Pegged as a potentially more fruitful arena for attractive valuations, the US middle market hasn't been overwhelmed with much new PE fundraising over the past several years. In 2016, though, 23 first-time middle-market funds—sized between $100 million and $5 billion—closed on a combined $8.4 billion, the most funds by count since 2009 and the fourth-highest tally for capital committed over the past decade.
Although not as impressive as the years before the financial crisis, one must bear in mind that fundraising efforts are likely to have been muted by investor perceptions of rising competition and subsequently complicated dealmaking economics.
With the increase in sums allocated to PE funds and consistently high-priced valuations at the upper end of the market, more and more general partners have been sourcing in smaller enterprise size ranges or, at the least, expanding their scope. That has led to increasing competition amid segments of the middle market.
PE firms simply can’t compete that much on price without potentially incurring hits to their free cash flows and eventual returns, perhaps explaining why the recent peak was comparatively mild, and the first quarter of 2017 saw a much slower pace.
That recent peak does still testify to fledgling fund managers’ appetite for deploying capital amid more typical targets, where purchase prices aren’t so heated that traditional PE strategies are less effective. The environment will be difficult to navigate, given the level of capital-rich competition, but targeting especially the lower reaches of the US middle market could still bear fruit.