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Middle Market

Private equity exit troubles hit the middle market

In Q3, the value of PE middle-market exits hit one of its lowest levels since the global financial crisis.

In Q3, US PE middle-market exit activity plunged to one of its lowest levels in more than a decade, as managers were reluctant to sell their assets at lower valuations.

The value of PE exits from middle-market companies totaled $23.2 billion in Q3, marking the second-lowest quarterly figure since Q2 2010, according to PitchBook’s recent US PE Middle Market Report. Only the pandemic-plagued Q2 2020 was worse.

Overall exit value fell 26.6% from the previous quarter and 74.1% from the peak reached in Q4 2021.

The middle market—where deals range from $25 million to $1 billion—also saw a further decline in PE exit count. Dealmakers struck 179 middle-market exits in Q3, representing a 7.1% quarter-over-quarter drop.

 

Depressed exit activity has resulted in longer holding periods for PE assets. The median holding time of PE assets from investment to exit grew to 6.3 years as of the end of Q3, marking the first time that the median holding period exceeded 6 years since 2014.

Despite the weakness, PitchBook analysts are optimistic about the prospect of a recovery in exit activity in the middle market. PE funds will need to deploy their mountains of dry powder, which suggests they will be willing to pay higher prices for deals, said Tim Clarke, PitchBook’s lead PE analyst.

Meanwhile, sellers will also be more receptive to lower valuations as they are under pressure to realize their investments and return capital to investors. There will likely be more sponsor-to-sponsor transactions targeting middle-market companies, increasing chances that PE firms will exit their investments.


Featured image by MirageC/Getty Images

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