InSight

Exit and Growth Strategies for Middle Market Businesses

PE Firms Targeting Middle Market Companies

By Kim Levin | Jan 12, 2016

middle marketTargeting middle market companies will likely hold true in 2016

Private equity (PE) investors are focused these days on both their investment exits and new capital commitments.  The third quarter of 2015 saw deal counts slump to levels not seen since the second quarter of 2013.  High valuations are keeping some firms from pulling the trigger on new investments while at the same time racing for the finish line on exits as the “seller’s market” continues to weaken.  World economic and political volatility remains a concern and is impacting PE exits, prospective targets and current portfolio holdings.

With valuations still at near record levels, 2015 has seen PE firms focusing their attention on investment targets in the middle and lower middle market and investing in smaller deals at slightly lower multiples.  At these price points, the PE investors still have room to enhance and exit within their pre-determined time frames and reach their desired rate of return.  Many PE investors would rather stay active and look to non-controlling stakes in profitable businesses than sit on the sidelines or worse, overpay… and middle market and lower middle market businesses sit squarely in their sweet spot.  To date, add-on investments have accounted for a record 62% of all PE investment in 2015.

This trend of targeting middle market companies will likely hold true in 2016 as well, as PE firms are still sitting on billions in “dry powder” that they will look to place.  Look to sectors that have been particularly hard hit, like energy, to provide a window of investment opportunity.

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