Does Private Equity Invest in Lower Middle Market Companies?

By Generational Equity


Does private equity invest in lower middle market companies?

This is a question we get asked quite frequently at our exit planning conferences. Because mega, billion-dollar private equity (PE) acquisitions tend to get all the attention in the business press, a good portion of middle market business owners are unaware of just how attractive their firms might be to PE groups.

Here are some recent statistics from Axial Forum:

“All things private equity remain healthy. According to PitchBook’s report on U.S. PE in the Middle Market, 654 U.S middle market private equity transactions closed in the second quarter of 2018 with a value of $87.6 billion. The middle market has seen robust activity, accounting for 60% of U.S. PE-backed deals, compared to 58% for all of 2017.”

Private Equity Honing in on the Lower Middle Market

This is fantastic news if you own a buyer-ready business and are in the market right now looking for buyers/investors. One of the most important buying groups to consider is private equity firms. Even though activity is high right now, not every lower middle market company is a viable PE target – firms are typically looking for specific targets based on industry, geography, size, market share, management depth, and more.  

This is why we recommend that you hire an experienced M&A advisory firm to give you guidance about buyer targets. One trend that is driving many PE firms downstream toward smaller and smaller companies is the strategy of using “add-ons” to grow a platform.

This is how Axial describes the movement:

“The middle market is still the darling of the industry, accounting for nearly 70% of all capital invested in private equity in the first half. And not surprisingly, many companies are gobbling up add-on acquisitions in today’s lower-growth environment. According to PitchBook, large platform companies scour the middle market for add-on acquisitions because its companies are large enough to move the needle, yet small enough to be digestible and potentially fly under competitors’ radars. Add-ons have accounted for 53% of middle market deals in the first half of the year.”

Axial makes an excellent point here: Because of their relatively small size, many of these add-on transactions get very little press (if any at all). You might be surprised to learn that many of your competitors are now funded by deep-pocketed equity firms with the goal of adding even more small to mid-sized firms to their larger entity.

The Potential of Private Equity Acquisitions

It is always interesting when we meet with potential clients one-on-one after our conferences and present research we have collected showing active investors in their industry. Quite often they are surprised to see the names of other middle market companies they know that have PE backing.

The truly interesting news is that the stockpile of capital with private equity firms only continues to grow, according to Axial Forum:

“It doesn’t look like there will be any change to the private equity market anytime soon. Even if macro-economic conditions change, private equity firms still have a stockpile of capital ready to deploy. The strong middle market private equity fundraising environment continued in 2018, with 72 funds raising $61 billion through the first half. The $847 million average fund size in first half of 2018 currently exceeds the high-water mark of $786 million set in 2009.”

Keep in mind that limited partners provide capital to private equity firms for one reason: To invest it! Every dollar of committed capital represents funds needing to find a home and be put to work. They might be put to work in your company, helping it to reach new heights of revenue and profitability.

Could Private Equity Investment Influence Your Exit Strategy?

If you are one of the thousands of business owners who have little understanding of how private equity firms operate in the lower middle market and have no succession plans in place, you need to attend one of our complimentary exit planning conferences.

There you’ll hear about all buyer types active right now during one of the strongest seller’s markets in ages, and gain the knowledge and techniques to exit your business for maximum value.

To learn more and to find out how you can attend, please use the following links:

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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