Expect competition for assets to remain high in the middle market even after the first quarter slump, a private equity source tells me. Despite a slight underperformance from 1Q21 highs, many firms remain interested in add-on acquisitions and there’s no sign of smaller bidder pools, he said. Recent data bears the argument out.
Buyside investment mandates soared in the first quarter of this year even as the quantity of new targets tracked by Axial’s lower middle-market database only ticked up slightly. That buyer interest is reflective of private equity seeking bolt-on deals after inking earlier platform acquisitions last year, according to Axial. The source tells me there’s also renewed interest in sectors that were previously out of favor.
A renaissance in the consumer sector, for instance, is forthcoming as the sector shows unexpected resilience passing through price increases to consumers. The materials and consumer sectors defied gravity in the past quarter to top 1Q21 highs in terms of both deal value and volume. Middle-market consumer sector companies are leading earnings and revenue growth in the first quarter, according to a Golub Capital analysis of portfolio companies to which it has lent. The average consumer sector company in its universe posted 1Q revenue gains of over 20 percent and earnings gains of over 14 percent.
It remains unclear whether buyer interest in add-ons and previously out-of-favor sectors will suffice to lead M&A volumes to fresh highs, but the landscape remains promising for dealmakers in search of transactions for now.