Beware of the Big Boys
January 15, 2008
Don't be shocked if a mega buyout firm is competing with you for your next mid-market deal.
After a three-year run that saw the biggest buyout funds seemingly abandon the middle market for ambitious public-to-private deals like HCA, EOP and BCE—not to mention dozens of $5 billion-plus transactions—mid-market bankers now tell me the giants are in fact coming down market to participate in mid-market auctions.
Granted, no one expects Blackstone or Permira to start trolling for companies with $5 million of EBITDA anytime soon. But many of the big shops already have funds earmarked for mid-market deals, while Silver Lake Partners is busy raising a fund—Silver Lake Sumeru—that will focus on mid-market deals.
The reasons are easy to understand. For one, the mid-market is the most active game in town right now, as the credit crunch has threatened several mega LBOs, which rely on syndicated loans and high yield debt to get done. At the same time, the appeal of 'growth buyout' financing for venture-backed companies with no immediate chance of exiting is motivating firms with venture funds to focus more attention on the mid-market.
Long term, I wouldn’t be surprised to see the mega buyout firms establish a greater presence in the mid market—through dedicated funds, partnerships or outright acquisitions of mid-market PE shops. Historically, the argument against going down market was that the big guys didn’t have enough time or people to dedicate to smaller deals where, with longtime private companies, even getting accurate financials is a real obstacle. But as the LBO giants continue to staff up with armies of analysts and biz dev types, that challenge may become more imagined than real.
At the end of the day, I don’t see the down market trend as cause for alarm for mid-market PE firms. The good firms will continue to compete, find deals and distribute returns to their investors no matter who’s at the auction table. And perhaps the focus on globalization will keep the big buyout shops only sporadically involved in the mid market. But regardless of the big firms, you can be sure the competitive landscape in the mid market will remain anything but static.
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