Middle market buyouts are on the path to recovery
September 21, 2024
Our Q2 US PE Middle Market Report provides the latest signpost that a gradual recovery in PE dealmaking is now underway, although it skews more to buying than selling.
As a reminder, this report tracks buyout activity only. Middle market dealmaking is defined as buyouts of companies with an enterprise value of between $25 million and $1 billion, or about $500 million in equity contribution at the top end.
This segment of the dealmaking market accounted for just shy of 60% of all buyout value in 2023 and it is where most buyout professionals and bankers spend their time sourcing deals. Measured by count, it represents more like 70% of the buyout market.
Key takeaways from this quarter's report include:
• Middle market buyout activity increased 12% YoY in H1. This is a bit stronger than the overall buyout market, which rose by a more modest 5% in value and 9% in count.
• Exit activity was flat in H1 on a YoY basis, reflecting a continued sellers' strike among sponsor owners, at least in this size segment. In this regard, middle markets lagged the overall market.
• Fundraising for middle market funds slowed, with fewer closes in H1 and a lower value of funds closed.
• Valuations stepped up. This may be short-lived as higher-quality companies have been leading the way. We believe that as buyout activity broadens, it will inevitably include lesser-quality companies and cause an interruption in the upward deal multiples trend.
Speaking of those valuations, our previous middle market report flagged the fact that public small caps had been trapped at a record low relative to large caps, and how any trend reversal could be a catalyst for private market values.
That dam finally broke in July when the small-cap Russell 2000 index rose by 10.1% while the S&P 500 declined by 19.6%, its best two-week streak relative to large caps in 38 years. The Russell index has shed approximately one-third of those gains but has been holding its own ever since.
Relative strength in public small caps can provide a "halo effect" for late-stage private companies—their closest cousins—prompting would-be sellers to embark on an M&A process. Let's hope this trend continues.
Download our free US PE Middle Market Report.
As a reminder, this report tracks buyout activity only. Middle market dealmaking is defined as buyouts of companies with an enterprise value of between $25 million and $1 billion, or about $500 million in equity contribution at the top end.
This segment of the dealmaking market accounted for just shy of 60% of all buyout value in 2023 and it is where most buyout professionals and bankers spend their time sourcing deals. Measured by count, it represents more like 70% of the buyout market.
Key takeaways from this quarter's report include:
• Middle market buyout activity increased 12% YoY in H1. This is a bit stronger than the overall buyout market, which rose by a more modest 5% in value and 9% in count.
• Exit activity was flat in H1 on a YoY basis, reflecting a continued sellers' strike among sponsor owners, at least in this size segment. In this regard, middle markets lagged the overall market.
• Fundraising for middle market funds slowed, with fewer closes in H1 and a lower value of funds closed.
• Valuations stepped up. This may be short-lived as higher-quality companies have been leading the way. We believe that as buyout activity broadens, it will inevitably include lesser-quality companies and cause an interruption in the upward deal multiples trend.
Speaking of those valuations, our previous middle market report flagged the fact that public small caps had been trapped at a record low relative to large caps, and how any trend reversal could be a catalyst for private market values.
That dam finally broke in July when the small-cap Russell 2000 index rose by 10.1% while the S&P 500 declined by 19.6%, its best two-week streak relative to large caps in 38 years. The Russell index has shed approximately one-third of those gains but has been holding its own ever since.
Relative strength in public small caps can provide a "halo effect" for late-stage private companies—their closest cousins—prompting would-be sellers to embark on an M&A process. Let's hope this trend continues.
Download our free US PE Middle Market Report.
Tim Clarke
Lead Analyst, Private Equity
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