Dealmaking in the lower middle-market appears to have experienced some chop, according to data from S&P Global Market Intelligence. 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. What gives?
S&P’s own take, that “investors loaded with cash sought bigger, later-stage investments,” is one possible answer. There’s backing for this thesis in the record fundraising hauls from middle-market private equity funds. And it’s worth considering that the somewhat larger total of smaller 2020 deals was likely stoked by cratering valuations in the wake of Covid’s onset. The 129 transactions struck that year is marginally higher than previous periods, somewhat magnifying the extent of the decline year over year.
But that’s only part of the story. Soaring deal multiples last year are also to blame as sectors with historically more reasonable valuations saw margin expansion and an accompanying rise in pricing power. The disproportionate share of deals executed in the technology sector, where this phenomenon was particularly acute, might also play a role.
The combination of higher multiples and heavier buyer pockets might mean the dearth of smaller deals is less about the volume of targets and more about market froth.
Plus, this phenomenon may well prove the point that makes the middle market so attractive to so many industry players—its stratification. Bain Capital Credit’s Mike Ewald told me last year that the surge in new buyer capital was concentrated in the upper middle-market, and these latest figures bear that notion out. Middle-market sponsors play in their own geographic, sector and size lanes to the extent that larger funds didn’t look down market at smaller targets. At least not enough to compensate for the higher than average number of deals that crept higher in value.
Will the trend continue as the year soldiers on? Email me at [email protected] with your view.
–Brandon Zero
