PE funds targeting the middle market had a solid fundraising year.
Their ability to return more capital to investors than mega-funds helped middle-market firms gain an upper hand in the race to build up their war chests.
In 2023, these funds collected $141.1 billion, the second-highest annual fundraising sum on record, according to PitchBook’s 2023 Annual US PE Middle Market Report. It was only surpassed by 2019’s peak of $154.3 billion.
However, only 162 middle-market funds closed last year, indicating the average fund size has expanded. The median size of middle market funds rose to $590 million in 2023 from $410 million in the previous year.
Middle-market GPs with a proven record of performance were indeed able to increase the size of their funds.
PitchBook data shows that just over 92% of the middle-market funds that closed last year were a step up from their predecessors. The rate is far above the broader industry, where only about 81% of all US PE funds closed on larger amounts than prior pools.
In one example of a notable step-up, in December, Incline Equity Partners’ sixth buyout fund amassed $1.9 billion, a 63.1% increase from its previous vehicle.
The report shows that middle-market vehicles were able to return more capital to LPs than larger funds, which helped these smaller players outperform in an otherwise tough market.
In H1 2023, middle-market PE funds returned a total of $88.7 billion to their investors and only called $66.3 billion, resulting in a $22.4 billion net inflow to LPs.
In comparison, mega-fund capital calls exceeded their distributions by $30 billion, which means that investors with allocations to these funds suffered a negative cash flow in that period.
It is easier to sell midsized assets than large-cap companies, which, to some extent, shields middle-market funds from the negative impacts of a stalled exit market.
The value of PE exits from middle-market companies experienced a rebound in Q4, hitting $24.4 billion compared to Q3’s $21.3 billion, showing that the market may have defied exit fatigue.
However, the full-year exit value for middle-market PE came in at $102.3 billion, the lowest in more than a decade, as the entire PE industry faced challenges.
Continuation funds, which allow managers to extend their holdings in their assets, constituted a significant portion of exit events last year. They will likely remain an important liquidity alternative to traditional exit routes.
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