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Middle Market Companies: Show Me The Money?

This morning, I was asked by a CEO about capital availability for middle market companies.   Is now the right time to raise capital or sell part of the company?  As you would expect, I’m often asked this, and I admit to writing about the subject frequently.  Thankfully, over the past year, the answer has been the same:


In their last report on middle-market M&A deal flow, PitchBook confirmed the strong market.  Transactions through 3Q2017 increased 13% to $233 billion over the same period in 2016.  They attribute the strength to a shift toward larger deals, but also toward a continued strength in private equity fundraising; In the first three quarters, private equity capital commitments are up 2.5% over last year.  In the “3Q 2017 US PE Middle Market Report, ” Dylan Cox, an analyst at PitchBook, wrote “Despite the unabated rise in prices, PE firms are finding ways to deploy capital.”

If there is a dark side to these impressive statistics, it’s that smaller middle market companies are experiencing lower M&A activity as a group, as financial buyers more actively seek bigger transactions.  The larger pools of capital at PE firms make it possible to invest in larger deals.  That said, first-time fund managers are becoming more prevalent, and they will play in the lower middle market to build reputation and experience.  These new funds raised $8.6 billion in total commitments in 2016, the largest amount since 2009.

A side note:  In PitchBook’s 3Q 2017 M&A Report, they report that the total market (middle market plus large corporate) M&A activity declined 23% to $1.4 trillion from the same period in 2016.  With middle market activity continuing to rise in contrast with the overall market, one can see that mid-size companies and their financing activity play an important role in the overall U.S. economy.

Raising non-control equity for middle-market companies benefits from the same dynamics – – more capital to deploy from private funds leads to continued market strength and consistent valuations.  At Highland Ridge, we are experiencing increased inbound inquiries from these funds, seeking advance notice of 2018 transactions.

Strong leveraged finance activity continues to be driven by private funds.  In their “Market Insights 4Q 2017” publication, PNC notes that “In the middle market, bank loan capital is available at attractive levels” and “For leveraged middle market companies, non-bank lenders are driving down borrowing costs as they quickly deploy excess funds.” An interesting comment from a large bank lender, to be sure.  And, further down the balance sheet, mezzanine activity remains strong, based on our frequent discussions with these specialized lenders.  Of course, there continues to be a wide range of mezzanine debt rates and structures, correlated with borrower credit strength.

While it’s unclear as to how long this robust market will last, there continues to be sufficient capital and strong interest by both strategic and financial investors to make acquisitions, non-control equity investments and, for private debt funds, leveraged finance.

Contact Highland Ridge Capital to discuss your specific needs.