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The middle market: What's the appeal for investors?

The middle market: What's the appeal for investors?

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.

Attractive characteristics
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.

Access the full Titanbay report here.

Important Disclosures
This material has been prepared by Titanbay Ltd and its affiliates (together, “Titanbay”) and is provided for information purposes only. This document is directed at professional investors and qualified investors who have sufficient knowledge and experience to understand the risks of investing in private market investments.

This material should not  be construed as legal, tax, investment advice or an invitation, general solicitation, recommendation, an opinion regarding the appropriateness or suitability of any investment strategy, or offer to buy, sell, or hold any investments or securities offered on or off the Titanbay investment platform. The views, opinions and estimates expressed herein constitute personal judgments of certain members of the Titanbay team based on current market conditions and are subject to change without notice. This information in no way constitutes Titanbay research and should not be treated as such. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice.

All information presented herein is considered to be accurate at the time of production unless otherwise stated and has been prepared from sources Titanbay believes to be reliable. No representation or warranty or guarantee, express or implied, is given as to the truth, accuracy or completeness of the information or opinions contained herein and material aspects of descriptions contained in this material are subject to change without notice. No reliance may be placed for any purposes on the information or opinions contained in this material. Titanbay is not responsible for any error or omission in this material, nor do we accept liability for any losses arising from its use. Non-affiliated entities mentioned are for informational purposes only and should not be construed as an endorsement or sponsorship of Titanbay.

Investments in private placements and private equity investments via feeder funds in particular, are complex, highly illiquid and speculative in nature and involve a high degree of risk. The value of an investment may go down as well as up, and investors may not get back their money originally invested. Investors who cannot afford to lose their entire investment should not invest. Past performance, including simulated performance, is not a reliable indicator of future performance. For private equity investments via feeder funds, investors will typically receive illiquid and/or restricted membership interests that may be subject to holding period requirements and/or liquidity concerns. Investors who cannot hold an investment for the long term (at least 10 years) should not invest.

Titanbay Ltd is an Appointed Representative of Brooklands Fund Management Limited which is authorised and regulated by the Financial Conduct Authority with firm reference number 757575. Copyright Titanbay 2023.

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