Private equity dealmaking in the U.S. lower middle market fell sharply between 1Q and 2Q 2016.
The first quarter of the year recorded not only the highest spike in activity in the U.S. LMM since the start of 2012, but also a clear peak in overall deal value. Yet 2Q fell in both counts, even though the overriding trends of adding on smaller companies and PE players’ continued interest still hold.
Note: The lower middle market defined as majority transactions sized between $25 million and $100 million.
U.S. private equity activity in the lower middle market
Beyond the fluctuation from quarter to quarter—and the consequent caution that must come when analyzing such numbers—the decline must be put in broader context.
First, on a yearly basis, U.S. lower-middle-market companies are still on pace to enjoy roughly the same level of interest as they did in the past two years, the heyday of the current buyout cycle.
Second, given the size of the companies involved, as well as the various political and macroeconomic risks that investors are taking into account, the steady rise of activity in the U.S. LMM peaked in the first quarter of 2016 as dealmakers sought to close whatever worthwhile opportunities were in play as quickly as possible. On a quarterly basis, the supply of quality in-market companies affects the rate of deal activity on a slight delay, suggesting the current decline is also due to most of the best targets having already been bought.
Finally, as the pipeline refills in certain sectors such as healthcare and technology, PE interest in the U.S. LMM could well revive to a healthier level, since many firms still need to put capital to work and trends in those aforementioned industries are still encouraging general M&A.