The middle-market buyout segment has been relatively underpenetrated by private equity (PE) investors, with less than 5% of mid-market companies backed by a financial sponsor. Despite this, there is strong interest among GPs and LPs alike, on the basis of the attractive characteristics and broad opportunities in the market. So what type of companies are classed as mid-market and what’s their appeal to PE investors?
While there is no universal definition of a mid-market business, private markets platform Titanbay classifies companies with enterprise values of between $100 million and $2 billion as middle market.
The middle market is large and highly fragmented, characterised by transactions that are less intermediated and more relationship-led, opportunities for “Easy” value creation, and lower reliance on leverage. Businesses tend to be more stable and established than small businesses or start-ups, but are more agile than larger peers.
Broader value creation
Given that mid-market businesses are typically less sophisticated and run by leaner management teams than larger businesses, there is a clear opportunity for mid-market investors to support businesses with strategic initiatives and operational excellence. Value creation can also make greater use of buy-and-build strategies, benefiting from fragmented markets and lower entry multiples for bolt-ons.
At exit, selling into the more competitive large buyout market can lead to multiple expansion, as well as greater exit optionality.
As such, it follows that mid-market funds show the potential for clear outperformance versus large buyout funds.
An important part of private equity portfolios
Titanbay believes mid-market private equity exposure is an important component of a well-balanced private market portfolio. The middle market is less correlated to the health of debt and equity capital markets than the large buyout space. And in the hands of expert managers, mid-market businesses also provide greater opportunity for easy value creation, and attractive growth potential.
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