New evidence points to the lower middle-market’s resilience during market turbulence. A fresh analysis of deals by Axial shows deal flow up 10 percent over 4Q21, even though volume fell just short of 1Q21. “The lower middle-market deal arena,” writes Axial CEO Peter Lehrman, “Thanks to its breadth and diversity across longstanding or emerging industry niches – has become one of the more stable areas of the market for both buyers and sellers.”

It’s a narrative that tees up well with what limited partners have told me about ongoing market volatility. Despite a near term pause in public market listings and widespread murmurs of sector wide markdowns, it’s business as usual for the increasingly acquisitive asset class in terms of deal interest. What has changed is their boundless appetites. Firms are still pursuing targets in their typical geographic, Ebitda, and sector strike zones, but are showing less willingness to stretch on valuation.

One PE source told me the lower middle-market valuations in his firm’s preferred sectors were never as inflated as those in the upper middle and large cap space to begin with. Slightly larger bids of yesteryear might start to normalize.

Axial sees the lower middle-market’s resilience in terms of deal structure, Lehrman writes in Axial’s Q1 pursuits report. A disproportionate amount of a private equity firm’s time is spent on add-on acquisitions, which tend to constitute the pool of lower middle-market deals.

And then there’s the matter of definitions. Some market observers might have seen a “lower” middle market drought in the offing for some time given 2021 figures. Private equity and venture capital invested in 53 percent fewer companies with sub-$100 million enterprise values in 2021 compared to the year prior, even as record capital raises and rampant fund formation spurred narratives of a sponsor-driven feeding frenzy, according to data from S&P Global Market Intelligence.

The smaller companies tracked by Axial could well provide a counterpoint to this narrative from a different part of the market.

Brandon Zero