Middle Market Private Equity Industry Update

Private equity buyers account for a significant portion of private company M&A transactions. If you plan to sell your company in the near or intermediate future, monitoring trends within the private equity industry can help you plan ahead and time your exit when conditions in the M&A market are favorable.

Political Uncertainty & Strategic Buyers

Private equity deal activity was heavily influenced by uncertainty surrounding the 2016 presidential election and potential policy changes under the new administration. Political uncertainty, along with other domestic and global macroeconomic factors, contributed to a decline in PE deal volume for the first time since 2013. In 2016, PE firms closed nearly 3,475 middle market M&A transactions worth a combined $417.8 billion, representing a 14.7% decrease in deal volume and a 9.6% decrease in total deal value over the previous year.1

US PE Deal Volume
US PE Deal Value ($B)

US PE Deal Volume

Source: Pitchbook

US PE Deal Value


 In addition to political and macroeconomic forces, the decrease in PE deal activity can be attributed to increasing competition from corporate or “strategic” buyers pursuing acquisitions. Following the recession, many corporations built up large amounts of cash on their balance sheets while slow economic recovery hindered organic growth. At the end of the second quarter of 2016, non-financial corporations held cash balances of nearly $1.5 trillion.2  With so much cash on hand and interest rates at historic lows, corporations are seeking M&A opportunities to achieve their growth objectives. A recent M&A trend report released by Deloitte showed that 43% of corporations plan to use their excess cash on M&A opportunities in 2017, compared to just 26% a year earlier. The focus on M&A marks a significant shift in corporate growth strategies over the past year, as only 30% of companies plan to invest organically in 2017 compared to 45% the prior year.3

Middle Market Segments
LMM: <$100M
CMM: $100M – $500M
UMM $500M – $1B

The recent increase in strategic buyers has hindered PE deal-making. Strategic buyers generally view acquisitions as long-term strategic investments and are generally willing to pay more for companies due to the synergies created through strategic acquisitions. In contrast, PE firms view acquisitions as short- to intermediate-term investors investments and must be able to meet investors’ return expectations after 5-10 years, so they aren’t able to be as competitive with their offers. As a result, many PE firms are shifting their focus towards the lower middle market (LMM) where there is typically less competition from strategic buyers.

Shifting Focus to the Lower Middle Market

The shift in focus by PE firms towards LMM deals can be observed by segmenting total PE deal volume by transaction size. While PE deal volume has decreased as a whole, the decline is much less pronounced in the LMM.


US PE Deal Volume by Segment
US PE Deal Value by Segment($B)


Source: Pitchbook


From 2015 to 2016, the number of LMM deals decreased by 12.2%. In contrast, the number of transactions involving companies in the core middle market (CMM) and upper middle market (UMM) decreased by 17.7% and 29.7%, respectively. While the total number of LMM deals has decreased, total deal value actually increased by 7.9% from $62.4 billion in 2015 to $67.3 billion in 2016. Over the same period, the total deal value decreased by 4.7% for CMM transactions and 20.5% for UMM transactions.

The simultaneous increase in LMM deal value and decrease in LMM deal volume can also be attributed to a changing competitive landscape. PE firms that were already established in the LMM are facing increased competition from PE firms that used to focus solely on the CMM. Increased demand for smaller deals from larger firms in an already crowded market has helped drive up multiples.

Add-on Strategies

The median transaction size of middle market PE transactions has decreased for the third consecutive year, dropping from $138 million to $134 million. Meanwhile, add-on acquisitions grew as a percentage of total PE buyout activity. Both trends illustrate how an increase in strategic buyers is influencing PE investment strategies.


Median PE Middle Market Deal Size ($M)
Add-on v. Non Add-on Activity

Source: Pitchbook



Rather than seek large platform acquisitions—where increasing competition from strategic buyers has made it difficult to find value—many PE firms are following a buy-and-build strategy where they pursue smaller companies that complement their existing portfolio companies. Rather than paying a premium for large platform acquisitions, they are investing capital to improve company performance and ensure successful integration.

A Seller’s Market

Many corporations plan to pursue strategic acquisitions in 2017, and many of the political and economic issues that caused uncertainty and impacted PE deal activity in 2016 will fall out of focus. PE deal activity is expected to rebound in 2017 and a growing number of firms will be focusing on add-on acquisitions in the LMM. With increased competition from strategic buyers and larger PE firms now focused on smaller deals, the M&A landscape in 2017 favors sellers in the lower middle market.

Corporations have excess cash on hand and PE firms are still sitting on a record amount of dry powder, which means they can move quickly to consummate a transaction. Additionally, increased demand for quality acquisitions by both corporations and PE firms will make it easier for sellers to create a competitive bidding environment. Business owners who are considering retirement have a valuable opportunity to maximize the value of their companies through a sale.

1 2016 Annual US PE Middle Market Report. Pitchbook.
2 https://www.wsj.com/articles/merger-deals-set-monthly-record-even-as-election-looms-1477614934
3 M&A Trends Year-end Report 2016. Deloitte

This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.