Big Picture

Billion-dollar corporations and global technology firms play a significant role in the US economy. That said, the large segment of mid-sized companies cannot be ignored. The Mid-Market has attracted many Private Equity investors because it promises immense growth opportunities. Mid-Market firms are highly fragmented and have greater potential for operational augmentation. Being more flexible and adaptive, these firms are quicker to innovate and capture the market. What’s more, mid-markets have traditionally stood strong in times of uncertainty, like in the US financial crisis of 2007-2009. At that time, mid-market companies provided 2 million jobs¹.

According to the 2022 Mid-Year Middle Market Indicator by the National Centre for the Middle Market, the annual revenue growth in the Mid-Market has been 12.2%². Mid-Market transactions include less leverage and lower valuation for acquisitions. This has made Mid-Market Private Equity more attractive to investors. The potential for revenue growth and wide margins also lure Private Equity investors. Not surprisingly, mid-market companies make up a considerable share of Private Equity deals.

Mid-Market Private Equity Structure

Mid-Market Private Equity is abroad term. While it refers to the size of a Private Equity company fund, it may also include the amount of the capital raised, the size of the recent funds, the average deal size, etc. But the most common answer to ‘what is Mid-Market Private Equity?’ is ‘a company with revenues between $10 million and $1 billion.’ Then again, some define the Mid-Market for Private Equity as firms with revenues between $25 million and $1 billion. Large Market Private Equity deals are, usually, $1 billion or more.

In our estimate there are 200,000 Mid-Market businesses in the US alone, which employ about one-third of the US workforce.

Segmentation of Mid-Market Private Equities

The Private Equity market can be categorized into different segments based on the size and scale of companies. We can segment it into:

These criteria may be particular to the US and may differ in different regions. According to these segments, Upper Mid-Market firms are largely for mega deals. The Private Equity mega funds transact deals over $1 billion and have individual funds of around $10 billion. Carlyle, Apollo, Blackstone, Warburg Pincus and Advent are some companies that may be included in this category.

The deal size and capital bases are not the only difference between Upper and Lower Mid-Market Private Equity firms. Upper Mid-Market differs from Lower Mid-Market in the following ways:

• Since Upper Mid-Market Private Equity firms’ funds are highly diversified and are active across all regions and classes like credit, infrastructure, etc., they may not focus much on Private Equity.
• Upper Mid-Market deals rely on heavy leverage and capital structures. They offer limited growth opportunities.
  
• Upper Mid-Market recruitment is a fast, stressful and on-cycle process. It helps to be from the top groups to have a chance.
• Career advancement might be sluggish, and you might take a lot of time to move up, as numerous people are in the mid- to top- level.

Source: Altius Strategic Consulting (ASC) Deal Database

Mid-Market Strategies and Relevance

Mid-Market companies are less mature and offer more scope for new Private Equity investors. Bigger companies offer less scope to increase earnings through operational enhancement. Mid-Market companies have huge inorganic growth opportunities. Private Equity firms help with capital, market consolidation and helpful strategies.

During economic turbulence, it is wise to invest in the Mid-Market. According to Mergermarket³ and White & Case data⁴ for 2022, while large-cap deals dropped by 40% in volume, the Mid-Market only fell by 19% for the same period. The Mid-Market offers more consistent deals in uncertain times, while large markets are limited. In the current market scenario, investors are strategizing Mid-Market deals and finding them more attractive.

The current and the most common strategy of Mid-Market Private Equity today is  ‘add-on’ deals. By Q3 2022, 72% of all Private Equity Mid-Market buyouts were ‘add-on’ deals2. An ‘add-on’ acquisition means buying a smaller company and integrating it into an existing company. The benefit? This buy-and-build strategy strengthens the company’s value, capabilities, market share and revenue. As a result, the parent company grows in value.

The Advantages of Mid-Markets in Private Equities

There are numerous reasons why the Mid-Market is attractive to investors:

• Leverage: The Mid-Market is less reliant on leverage. Since last year, the availability of acquisition finance has been low, posing a challenge for Private Equity investors. This was a big setback for large investors relying on financial engineering. This strategy may work when the investors hope the price increases in the bullish market, where the credit is cheap and abundant. When the interest rate gets high, it becomes hard to deliver. Mid-Market companies use less leverage and can be bridged with equity. They don’t create more individual assets for the sponsors.
• Low Entry Valuation: Mid-Market companies have always meant lower entry multiples. Large deal funding has become increasingly rare and expensive. Smaller deals in the Mid-Market space have gained more momentum. Investment firms prioritize lower valuations to go ahead with the higher equity transactions.
  
• Wide Exit Windows: Strategic buyers do not invest in big-ticket Mergers & Acquisitions, especially during uncertain times. Large-cap investors have to wait for an exit route to open up during these periods. In the Mid-Market, there are exit routes. This is why trade buyers are more comfortable buying smaller businesses. This way, they protect their balance sheet, sell their Private Equity to bigger managers and close secondary buyouts.

Bottom Line

Private Equity firms know the innumerable growth opportunities in the Mid-Market. These investors are also entering the Mid-Market segment to experience innovative developments, scale their work and improve their outcomes. The Private Equity acquirers are rolling up their sleeves and moving to the Mid-Market, aiming for long-term growth. They believe that operation improvement, better opportunities and successful exit are better models for creating value.

About Altius

Founded in 2019, by Big Four management consultancy professionals, Altius is a premier global advisory firm to Private Equity funds and their portfolio companies in the Mid-Market. From due-diligence to value-creation and from strategy through execution, Altius delivers sustained impact with velocity, precision and expertise at every stage of the M&A lifecycle. We are thought leaders in carve-outs, integration and value creation using levers such as Global Capability Centers, Global Business Services, Zero-Based Design and Digital Transformation. We support PE Deal and Operations teams from due diligence to exits, across asset-intensive and information-intensive industries in America, Europe, and Asia with a global footprint of practitioners.

Notes

      ¹ United States Private Equity Council, Everything You Need To Know About Middle Market Private Equity, 2023.

      ² National Center for the Middle Market, Mid-Year Middle Market Indicator, 2022.

      ³ Mergermarket, 2022.

      ⁴ White & Case, 2022.