Happy days are here again?
M&A Journal, By Russell Greenberg, Managing Partner of Altus Capital Partners, Inc.
Are we at the start of a new golden era in middle market deal-making?
After more than 20 years of deal-making, both as an investment banker and as a private equity investor, I have to say that all the elements are coming together to make the next several years an exciting time to be a middle market investor.
First, deal volume in the middle market has risen dramatically since the middle of 2008 when the bottom fell out of the market, pushing deal flow down by over half from what it was in 2006 and 2007. My playing field – the $100 million and under deal – went from about 3,100 deals in 2007 to about 2,200 deals in 2009. That’s the lowest number of under-$100 million deals since 2002.
Most of the decline over the last two years reflected the lack of financial leverage available, as banks pulled back due to the credit crunch and the recession. Since buyers and sellers couldn’t agree on purchase prices, buyers wouldn’t move forward because they had little visibility to forecast the future and an inability to obtain reasonable amounts of leverage.
Now, we’ve been through the depths of the recession, the economy is improving and buyers and sellers have an ability to try to better project revenues and earnings. Furthermore, corporate buyers are sitting on records amount of cash and are actively seeking acquisitions to spur revenue growth. Although, there is still uncertainty from the consumer and this recovery is uneven and choppy, transactions will get completed because sellers and buyers are coming to recognize that there must be compromise in order for sellers to gain liquidity and for buyers to build their companies.
So what does the future look like? First, the future is very positive, as evidenced by the recent large increase in completed transactions. Completed transactions between $10 million and $100 million rose by over 40% in the second quarter of 2010 compared to the second quarter of 2009. Buyers and sellers are reaching agreements since both sides can better forecast future results.
Megamergers are fraught with leverage, market and competitive risks, and it may take a long while for the big deals – larger than $5 billion – to come back, (only 5 transactions over $5 billion were done in the second quarter.) Frankly, in today’s environment, the financial leverage and the benefits of doing a really large deal aren’t as evident as working with middle market companies.
To provide further perspective on the volume of transactions by size, there were only 39 transactions done in the second quarter between $1 billion and $5 billion. In contrast, there were 335 reported transactions completed between $10 million and $100 million during the same period.
What makes me optimistic as a private equity investor, however, is both the number of companies in the lower middle market and the ability to enhance value with these businesses.
Here are my Top 7 reasons for being excited about lower middle market deals: