The U.S. economy’s dynamism is largely fueled by the middle market, accounting for a whopping one-third of its entire GDP. This segment’s significance in the private equity landscape is paramount, given its contribution to a majority of the deal values. Let’s delve into this influential market segment, its allure to private equity investors, and its resilience in the face of evolving market conditions.
Decoding the Middle Market in Private Equity
Middle-market businesses are those that boast revenues ranging from $10 million to $1 billion. Impressively, the U.S. houses almost 200,000 of these businesses, which collectively offer employment to around 48 million individuals – constituting nearly a third of the nation’s workforce.
In the realm of private equity, PitchBook characterizes the middle market as entities backed with investments between $25 million and $1 billion. Interestingly, there’s also a sub-segment: the lower-middle market, which encompasses businesses valued at a minimum of $10 million. On the higher end of the spectrum, you have the large-cap private equity deals that soar beyond the $1 billion mark.
Undeniably, the middle market’s sheer volume makes it a pivotal piece in the private equity puzzle, offering invaluable insights into the broader industry’s health and trends.
Why the Middle Market Resonates with Private Equity Players
Imagine a Goldilocks scenario in the business realm – that’s what the middle market represents. These businesses are sizeable enough to weather economic downturns, yet they’re agile enough to pivot swiftly. Most are helmed by competent management teams, offer mature products and services, and have consistent revenue streams. Such traits make them tantalizing targets for private equity stakeholders.
Furthermore, the middle market’s fragmented nature – devoid of gargantuan players – allows ample opportunities for organic growth and value-enhancing acquisitions. There’s also a bounty of possibilities to infuse technological advancements for operational prowess, build formidable teams, and penetrate lucrative markets. This all converges to make the middle market a hub for growth and innovation.
Navigating the Current Financial Climate
Historically, the middle market has demonstrated remarkable resilience, especially through the financial turbulence of previous years. However, 2022 was not without its trials, marked by challenges such as global inflation, looming interest rate hikes, supply chain disruptions, and geopolitical tensions like the Russian-Ukraine conflict.
Given the heightened expenses and dwindling availability of funding for mammoth deals, private equity investments have witnessed a trend towards more manageable, smaller deals. There’s a discernible tilt towards deals with modest valuations, allowing for more significant equity stakes. A testament to this trend is the uptick in deals valued under $25 million, which grew from 30.3% in 2021 to 39.3% by Q3 2022.
To adapt, many investment entities are exploring alternative financing avenues such as deferred equity and seller financing, ensuring they remain in the game.
The Rise of Add-On Acquisitions
The current modus operandi in the middle market PE realm is centered around smaller, add-on deals, which constituted 72.3% of all PE middle-market buyouts by Q3 2022.
In PE, add-on acquisitions are smaller company purchases meant to bolster and integrate into an existing portfolio company. This approach aids in enhancing the parent company’s value by augmenting its capabilities, market reach, and revenue channels. Typically, these add-ons instantaneously add value, be it through tech enhancements, territorial expansion, or brand development.
PitchBook remains poised to track the outcomes of this burgeoning era of add-on acquisitions in the middle market PE space. Given the sector’s commendable navigation through the prevailing challenges, there’s anticipation that it will continue innovating and effectively addressing both age-old and emergent challenges.
For a comprehensive analysis of the recent shifts in the middle-market private equity deal-making landscape, be sure to download PitchBook’s Q3 2022 US PE Middle Market Report, supported by Antares Capital and LBMC.
The Top 50 Middle Market PE Firms
Top PE Firms in the Middle Market™ is the oldest and most respected program designed specifically to acknowledge and promote small and mid-sized leading private equity firms in the middle market.
- Access Holdings – Business Services, Consumer Services
- Acharya Capital Partners – Manufacturing, Business Services, Technology
- Aldine Capital Partners – Business Services, Consumer Products, Consumer Services, Industrial, Technology
- Align Capital Partners – Manufacturing, Business Services, Industrial, Distribution, Tech-Enabled Services, Software
- Altamont Capital Partners – Business Services, Tech-Enabled Services, Consumer Services, Healthcare, Financial, Industrial, Industrial Services, Retail Services, Restaurants & Franchising
- Argand Partners – Business Services, Industrial, Manufacturing
- Argosy Private Equity – Business Services, Manufacturing
- Blue Sea Capital – Healthcare, Industrial, Aerospace, Defense
- Borgman Capital – Food & Beverage, Infrastructure, Real Estate, Manufacturing
- Bow River Capital – Industrial, Healthcare, Business Services
- Boyne Capital – Business Services, Consumer Services, Industrial, Healthcare, Technology, Agriculture, Energy
- BPOC – Healthcare
- Carousel Capital – Healthcare, Consumer Services, Business Services
- Clarendon Capital – Transportation, Distribution, Logistics
- Clearview Capital – Industrial, Healthcare, Business Services, Consumer Products, Manufacturing
- Frontenac – Consumer Services, Industrial, Business Services, Consumer Products
- Frontier Growth – Technology, Business Services
- Gauge Capital – Business Services, Technology, Consumer Services, Healthcare, Industrial
- HCI Equity Partners – Aerospace, Industrial, Consumer Services, Business Services, Transportation, Defense
- Huron Capital – Business Services, Consumer Services, Transportation, Industrial
- JLL Partners – Business Services, Healthcare, Industrial
- L Catterton – Consumer Products
- Leeds Equity Partners – Education, Training, Information, Data Management Services
- Levine Leichtman Capital Partners – Business Services, Consumer Services
- LongueVue Capital – Healthcare, Business Services, Industrial, Consumer Services
- Main Street Capital – Business Services, Energy, Healthcare, Industrial, Technology, Consumer Products
- Martis Capital – Healthcare
- McNally Capital – Aerospace, Industrial, Business Services, Defense/Firearms
- MiddleGround Capital – Manufacturing, Business Services, Industrial, Distribution
- Northlane Capital Partners – Business Services, Healthcare
- Norwest Equity Partners – Business Services, Agriculture, Consumer Services, Consumer Products, Industrial
- Orangewood Partners – Healthcare, Consumer Services, Consumer Products
- Pfingsten Partners – Industrial, Business Services, Manufacturing
- Platte River Equity – Aerospace, Industrial, Agriculture/Chemical
- Prairie Capital – Healthcare, Business Services, Consumer Products, Consumer Services
- QHP Capital – Healthcare
- Rubicon Technology Partners – Software
- Salt Creek Capital – Consumer Services, Healthcare, Industrial, Business Services
- Shamrock Capital – Consumer Services
- SJ Partners – Business Services, Consumer
- Spell Capital Partners – Industrial, Manufacturing
- Summit Park – Business Services, Consumer Growth, Industrial Growth
- SunTx Capital Partners – Business Services, Manufacturing
- Sverica Capital Management – Business Services, Healthcare, Industrial, Technology
- Transom Capital Group – Technology, Industrial, Consumer Products, Consumer Services, Business Services
- TriSpan – Business Services, Healthcare, Restaurants
- Trivest Partners – Consumer Services, Business Services, Healthcare, Distribution, Manufacturing
- Turn/River Capital – Software, Business Services
- TZP Group – Software, Business Services, Media Services, Tech-Enabled Services, Specialty Finance, Franchise Services, Travel & Leisure
- Valesco Industries – Manufacturing, Business Services, Distribution, Food & Beverage, Residential Services, Auto-Aftermarket, Sports & Recreation, Infrastructure
Please note that the list only represents firms based on the provided data. Rankings and categorization of these firms can be subjective, and it’s always good to have comprehensive research and due diligence before any engagement.
