Middle-market PE activity in the US continued unabated in 3Q, with $233 billion invested through 1,652 deals so far this year, according to our recently released 3Q 2017 US PE Middle Market Report. The fourth quarter should help push 2017's figures past last year’s, with at least $51 billion in announced deals on top of what’s already closed. This year’s middle-market engine comes from the upper end (between $500 million and $1 billion of estimated value), which is already ahead of 2016 levels in both deal count and value. The middle market as a whole has traditionally been powered by the core and lower segments, but both are set for a decline in volume this year.
Valuations, which have ballooned to a 10.7x median, are playing a role. Current upper-middle-market company values are quietly benefiting from deal size inflation and a mountain of dry powder, particularly from larger funds hitting the market. Combined with a lack of quality companies on the market, those factors allow many businesses to see what kinds of prices they can fetch when they do test the waters, and more often today those high asking prices are being met.
Another factor at play is a resurgence of secondary buyouts, which we’ve harped on ad nauseam. Financial sponsors looking to sell in 2017 are taking advantage of current multiples, knowing full well the need on the buy-side to deploy capital. In many cases, companies that were bought for a lower- or core-middle-market price have grown larger under PE ownership, and implied values are notched up further by the multiples buyers are willing to pay. Add up all those components—record fundraising, record multiples and a stalling exit environment—and it’s less surprising to see more froth at the upper end of the market.