As prices remain stubbornly high in many cases, a surge in overall PE deal value in the U.S. lower middle market is not wholly unexpected—on a quarterly basis, value was up over 80% in 1Q while transactions jumped 14% in number.
(PitchBook defines the lower middle market as buyout transactions between $25 million and $100 million).
Quality opportunities remain costly and increasingly rare, leaving sellers with the upper hand, while on a broader basis, expectations between buyers and sellers are still being worked out. This has translated into a considerable uptick in investment in deals between $25 million and $100 million; in fact, 1Q 2016 recorded the highest quarterly deal value since the first quarter of 2008.
Beyond competition and an expensive climate, other factors contributing to this surge include the raft of small PE funds that have been launched over the past couple of years, as well as the overall investment strategy shift to building and buying. Financing flow in the smaller end of the market also remains strong, likely part and parcel of well-regarded PE firms hunting for add-on opportunities.
As long as similar general market conditions persist, deal flow in the lower middle market should remain strong.