Staying Ahead of the Curve in the Middle Market

The dynamics of the middle market are changing faster than ever before. It’s more competitive, more efficient and presents a number of challenges to finding the right deals – and, ultimately, getting those deals done. Although there is an abundance of capital and the lending market continues to be highly robust, multiples remain high and firms are having a harder time identifying deals that fit their investment strategies and yield a return that will satisfy principals and limited partners.

So how do we navigate this challenging environment?
Based on our knowledge of the middle market in general, and New York-based firms in particular, we suggest that our members consider the following four steps for success: Recognize the deal environment has changed. For continued success, firms must be cognizant of today’s market dynamics and adjust their approach to align with the new reality of readily available equity and debt, a highly efficient deal market, sophisticated sellers (both sponsor- and founder-owned businesses) and an embedded, professional business development function across much of private equity. Good deals are still out there, but the road to success is quite different than it was just five or 10 years ago Higher multiples aren’t going away any time soon. Private business owners are inundated with calls from investment banks, buyside specialists and private equity. Ten or 15 years ago, business owners generally didn’t know what a multiple or private equity was.

Today, business owners are much more savvy and are and educated on their liquidity options. Sometimes it’s rational, sometimes it’s not. We call it the “country club effect.” If one owner tells his golfing buddy that he got 9x for his business, the golfing buddy thinks, “We’ll I’m going to get 10x.” It can be a hard battle to fight, but firms must do their due diligence and make a rational case for why their offer is the right deal for the seller. Commit to value creation. Buying a business and hoping you can pay down the debt is not a viable strategy in today’s market. This may still work with distressed deals, but healthy deals require more. We’ve seen a proliferation of firms developing operating partners and operating strategies that are focused on value creation as a central part of their investment thesis. It’s no longer just about stripping out costs; it’s about growing the business. When you buy a business at 10x, you can’t simply rely on creating cost efficiencies alone, you must find ways to grow the business. ACG New York has recognized this and last year we hosted our first-ever value creation conference. We have a growing membership of value creation consultants that can help with scaling strategies, online marketing strategies and talent management as well as with improving cost efficiencies and gross margins. The value creation approach is becoming more and more important to success in private equity investing.

Talk to your peers. To be sure, our industry is highly competitive and we have an understandable tendency to keep our best ideas to ourselves. However, it is also true that private equity firms sell to other private equity firms. If your peers have better understanding of your business, your portfolio companies and how you might work together, there are opportunities for you. Understanding this, ACG New York is launching the first ever invite-only “private equity-to-private equity” deal-sourcing event in November. Exclusive to private equity firms, this event will allow our members to share deals they are bringing to market with other members and promote relationship building, collaboration and deal making. This will be the first private equity-to-private equity program we have ever sponsored, but we believe it will be the first of many. Additionally, we have a quarterly gathering of private equity professionals at the Control Investors Roundtable. At ACG New York we are committed to helping our members prosper—and helping you stay ahead of the curve in the everchanging middle market is just one way we can provide value. We have a broad range of programs coming up this fall and we hope you will take advantage of as many as your schedule allows. When we have a robust deal-making environment, all of our members—including members in transaction advisory (attorneys, accountants, valuation firms) and value creation consultants—benefit.

David Hellier is President of ACG New York and a Partner at Bertram Capital.
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