Healthy Fundraising Geared Toward US Middle Market Sets Stage For Competition

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US Middle Market

Pegged as a potentially more fruitful arena for attractive valuations, the US middle market hasn’t been overwhelmed with much new PE fundraising over the past several years. In 2016, though, 23 first-time middle-market funds—sized between $100 million and $5 billion—closed on a combined $8.4 billion, the most funds by count since 2009 and the fourth-highest tally for capital committed over the past decade.

Although not as impressive as the years before the financial crisis, one must bear in mind that fundraising efforts are likely to have been muted by investor perceptions of rising competition and subsequently complicated dealmaking economics.

With the increase in sums allocated to PE funds and consistently high-priced valuations at the upper end of the market, more and more general partners have been sourcing in smaller enterprise size ranges or, at the least, expanding their scope. That has led to increasing competition amid segments of the middle market.

This fund run by a SAC Capital alum bought restaurant stocks amid the pandemic

restaurantPrentice Capital Management was up 6.6% for the first four months of the year, compared to the S&P 500's 9.3% decline and the Russell 2000's 21.1% decline. The HFRX Equity Hedge Index was down 9.4% for the quarter. Q1 2020 hedge fund letters, conferences and more Gross and net exposures In his first-quarter letter to Read More

PE firms simply can’t compete that much on price without potentially incurring hits to their free cash flows and eventual returns, perhaps explaining why the recent peak was comparatively mild, and the first quarter of 2017 saw a much slower pace.

That recent peak does still testify to fledgling fund managers’ appetite for deploying capital amid more typical targets, where purchase prices aren’t so heated that traditional PE strategies are less effective. The environment will be difficult to navigate, given the level of capital-rich competition, but targeting especially the lower reaches of the US middle market could still bear fruit.

Note: This column was previously published in The Lead Left.

For more data and analysis on the industry, be sure to download our 1Q US PE Middle Market Report!

Article by Garrett James Black, PitchBook