Mid-market private equity shows resilience amid macroeconomic uncertainty

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Whilst activity among ‘mega’ deals slows, the mid-market sector remains resilient, with plenty of dry powder yet to be deployed.

Have you noticed fewer ‘mega’ private equity deals hitting the headlines lately?

mid-market private equity demonstrated resilience, with deal volume and multiples remaining strong

If so, then you’ve already detected the recent “cooling off” of the deal environment on the large deal size end of private equity. The downward trend has been triggered by macroeconomic factors including sharply rising interest rates, which have affected buyout firms’ ability to finance takeovers with debt.

Simon Chambers, Partner in the Debt Advisory team commented: “Debt from the private credit market is still available for PE-backed deals whereas banks and relative value investors are tending to focus their capital elsewhere or have the ability to pause whilst stability and indeed new market norms returns.”

Despite diminished mega deal activity, mid-market private equity has demonstrated resilience, with deal volume and multiples remaining strong. Deal multiples, which experienced falls from a record high of 13.5x in 2021 to 10.9x in H1 2022, sank just marginally in the mid-market segment, from 12x in 2021 to 11.4x in the same period. This suggests that private equity firms continue to have confidence in mid-market businesses and mid-market funds’ ability to perform to growth expectations.1

we anticipate transaction volume and value for high quality businesses to remain robust into 2023

Marcus Archer, Head of Private Equity at Clearwater International comments: “With plenty of dry powder still available, the mid-market remains an environment of dynamic deal activity. Driven by growth sectors such as TMT, healthcare and business services, we see PE investors continuing to actively invest in SMEs, start-ups and fast-growing entrepreneur-led businesses. With a focus on markets experiencing positive tailwinds and by working with enterprises which demonstrate strong positioning to create value, we anticipate transaction volume and value for high quality businesses to remain robust into 2023.”

Private equity’s next-gen value drivers

steady shift towards next-generation value drivers

2022 has presented no shortage of challenges for businesses to contend with – from geo-political forces to the mounting climate emergency. Methods of futureproofing against uncertainty are in high demand, and with a new era of business risk dawning, this is accelerating a steady shift towards next-generation value drivers.

Strong positioning on ‘megatrends’ is becoming central to defensible company valuations, chief among these being tech enablement and cybersecurity as well as ESG and sustainability. As the tech boom keeps booming (global tech M&A was the most active sector in terms of both value and volume in H1 of this year2) – and the digital economy continues to rise, tech enablement has become a high priority value driver, investigated early in the investment lifecycle no matter the sector.

digital economy rises, tech enablement becomes high priority value driver

The integration and activation of advanced technological solutions now serve as evidence of businesses’ readiness to survive and thrive in a digital-first world. Meanwhile, ESG has also evolved – from a disconnected concept and investment preference to a vital indicator of companies’ attitudes towards innovation and forward-thinking. Thus, not only has positive positioning in ESG/sustainability become necessary in its own right, but it is also a barometer signalling the likelihood that next-generation solutions will be meaningfully woven into the fabric of business.

Jo Daley, Head of Impact comments: “Reporting and experience is telling us that ESG KPIs are playing a much bigger role in investment decisions for LP’s and technological advancements are supporting this integration. This data-driven decision-making also focuses on value creation as well as traditional risk mitigation for funds.

Resilience remains key for positioning businesses to market and strong ESG integration provides a much more resilient business proposition, increasing investor confidence on returns. Businesses who embed ESG within their organisation are adopting a future-proofing and horizon scanning strategy to pro-actively manage the evolution of the regulatory landscape, as well as analysing risk and potential impacts.”

Synergetic investment in the mid-market

record-breaking deal activity in 2021 and a very positive first half of this year, the mid-market PE outlook remains promising

For businesses looking to reposition on megatrends, to formulate new models, bridge talent gaps or make strategic appointments that support expansion, investment from the right private equity fund may be too good to pass up. By contributing funding and expertise, PE firms can support their portfolio companies to pursue new growth strategies and to help steady the ship in unpredictable times.

And as mid-market businesses look for new pathways forward, private equity funds in the current market have both cash reserves to hand and plenty of enthusiasm to invest. By using all equity funding to buy a high quality business, rather than raising debt to part fund the deal, PE funds are able to move faster on the assets they find attractive, with the confidence that debt funding can be arranged post-transaction to regain equity.

Marcus Archer adds, “Whilst geopolitical and macroeconomic forces are dampening activity amongst the largest deals, we’ve seen the mid-market holding steady. PE funds are consistently moving at a rapid pace to secure quality assets in markets with strong tailwinds, where there is resilience in the business model and where a strong growth trajectory is evident. After seeing record-breaking deal activity in 2021 and a very positive first half of this year, the mid-market PE outlook remains promising.”

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