November 8, 2017
Private Equity: Funds Seek Big Returns in Small Potatoes
This Nixon Peabody blog says that in an increasingly competitive middle-market M&A environment, PE funds are looking at the little guys to provide big returns. Here’s an excerpt:
As the private equity industry matures and competition for middle-market acquisition targets becomes super heated, some private equity firms are moving downstream into the lower brackets of the middle market in search of additional opportunities and higher returns. Though not without risks, the lower middle market provides opportunities for outsized returns to those private equity investors willing to roll up their sleeves and take a hands-on approach to operational improvements.
First and foremost, the lower middle market simply offers a greater number of potential targets. There are approximately 350,000 companies with annual revenues between $5 million and $100 million, while there are only 25,000 companies with annual revenues between $100 million and $500 million, and only a few thousand companies with annual revenues in excess of $500 million. The lower end of the middle market also has the most new entrants. New companies are constantly being formed, maturing, and looking for growth capital.
While the lower-middle market presents significant opportunities, the blog also notes that it presents some significant challenges as well. Target companies often lack infrastructure, operational experience, and experienced management. That means PE investors in the lower end of the market have to be willing to roll up their sleeves and take on significant management & operational responsibilties.
– John Jenkins