The lower middle market, when held up against the overall middle market, requires a greater amount of focus on growth from the private equity firms that are conducting deals within the space, explains Maneesh Chawla, principal at Prospect Partners. The Chicago private equity firm recently completed an add-on acquisition in April when it purchased EDN Aviation Inc. and folded it into current portfolio company Velocity Aerospace Group Inc., an aviation maintenance and repair service. Before that, it picked up family-owned business Wedgewood Hospitality, a growing provider of wedding and banquet services. Mergers & Acquisitions recently caught up with Chawla at ACG Boston DealSource Select to talk about the nuances and hurdles of completing deals at this end of the M&A chain. (For video, see "Prospect Sees Potential in Smaller Segments" below.)
What’s challenging lower middle market companies?
The challenges are actually the opportunities. Lower middle-market companies typically have two or three really strong people at the top, but maybe don’t have the depth beyond that, or their information systems may not be as strong. Perhaps they are lacking capital. Those are the opportunities we see in getting deals done and identifying areas of growth.
What’s different about the approach that PE firms take toward the lower middle market?
A big part of our business is about identifying people and businesses that we think we can be a good partner for. We’re typically the first capital involved, and these companies that have had these challenges of needing to build their team, expand geographically or maybe do acquisitions for the first time — companies really need to identify a partner to help them navigate through that. So it’s much more about a company professionalizing itself with a partner with whom they can build a business than it is having another institutional partner or owner in the business.
What are the benefits of pursuing small-segment companies such as Wedgewood Hospitality?
It’s an opportunity for us to have a little bit more of an imprint on the business, be more engaged and see more tangible evidence of our efforts. We get involved with companies that may have certain challenges or constraints and need to have a transaction or partner that could really help them get to the next level. Wedgewood Hospitality is a great example. It was a company that had grown really well — a family-owned, father and son, team in the wedding and event hospitality space. They’ve opened new locations. It requires capital and the team needs to grow over time as they continue to expand. As well as having the opportunity to take some chips off the table to be rewarded for all their efforts and all their success in building their business to date.
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Corrected July 15, 2014 at 4:55PM: 3652259023001