New President, Congress Brings Increased Focus On Middle-Market PE

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The 3Q 2016 US PE Middle Market Report examines private equity investment in the US middle market as it continues to slide. Middle-market PE activity overall is now declining at a faster pace than the broader market, but limited partners are still showing strong appetite for exposure to the asset class. Sponsored by Madison Capital Funding and developed in partnership with ACG, the report also covers PE exit and fundraising activity to provide a comprehensive overview of PE activity in all segments of the middle market.

Preparing To Weather A Storm


Three-quarters of the way through the year, middle-market PE continues its slump. Though still relatively strong on a historical basis, both the number of transactions and the total value of those deals are tracking behind last year. Further, middle-market deal value has lagged significantly more than in the wider PE landscape, which has been supported by increased activity above the $10 billion price range. Exits have also diminished this year, and PEGs are still warm to the idea of buying companies from one another due in part to the cooling of the IPO markets.

As middle-market company inventory continues to rise, EBITDA multiples have also grown, making it harder than ever to find attractive investment opportunities. Extra scrutiny continues to be necessary when sourcing deals and performing due diligence, as portfolio companies must be prepared for a potentially volatile future. We hope this report is useful in your middle-market practice. As always, feel free to send any questions or comments to [email protected].

Dylan Cox



New President, Congress Brings Increased Focus On Middle-Market PE

by Gary LaBranche & Amber Landis

For the past five years ACG has worked to bring the “Voice of the Middle Market” to Washington, DC, and opened a Washington, DC office last year to strengthen that message. With the advent of a new president and a new Congress, the work ahead promises to be more challenging than ever.

Over the next two years, stronger enforcement actions and stepped-up examinations of PE firms can be expected from the industry’s chief regulator, the Securities and Exchange Commission (SEC). Since 2012, advisers of private funds with $150 million or more in assets under management have to register with the Securities and Exchange Commission and comply with the reporting and compliance standards of the Dodd Frank Act. While aimed at the largest firms, the Act’s one-size-fits-all requirements have hit small and midsize advisers hard, requiring significant time and expense to comply with often duplicitous and burdensome reporting that have no tangible benefit to investors or the public.

This why ACG has been working proactively with regulators and legislators about ways to improve the most ambiguous regulation. ACG helped to shepherd a bipartisan bill through Congress that would modernize the 75-year old reporting requirements that most burden middle-market PE firms. The bill, the Investment Advisers Modernization Act (H.R. 5424), is sponsored by Reps. Robert Hurt, R-Va.; Juan Vargas, D-Calif.; Steve Stivers, R-Ohio; Bill Foster, D-Ill., Randy Hultgren, R-Ill.; and Krysten Sinema, D-Arizona. The bill modifies requirements of the Investment Advisers Act of 1940 to reflect the PE investor model, while also maintaining SEC oversight and investor protections.

ACG joined several other organizations supporting H.R. 5424, and in mid-May, ACG Private Equity Regulatory Task Force (PERT) member Joshua Cherry-Seto, CFO of Blue Wolf Capital, testified before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises in support of the bill. On September 9, H.R. 5424 was passed with a vote of 261 to 145, with 35 Democrats voting in favor of the bill.

While this progress is important, the Senate has yet to pick up the bill and the Obama Administration is on record with a threat to veto anything that amends the Dodd-Frank Act—despite the unintended consequences for private capital providers and the small and midsize companies they invest in.

ACG will continue to be proactive about the need for meaningful regulatory reform with the new Administration and Congress. But many observers predict that the industry should brace for expanded media scrutiny as well as enhanced examination and enforcement. This provides a unique opportunity for the industry to step up and aggressively promote its role as a net-jobs creator, builder of businesses and contributor to economic growth. As revealed in collaborative research from ACG and PitchBook, found at, middle-market PE grows more jobs and company revenue when compared to all other companies in the US economy between 1998 and 2015. That is a track record of accomplishment that can withstand the brightest scrutiny.

The Buyout Cycle Continues To Slow


Middle-market PE activity in the US continued to slow in the third quarter, following a similar trend as the wider PE marketplace. $265 billion in deal value closed across 1,330 transactions through the first three quarters, representing a 9.7% year-over-year (YoY) decrease in enterprise value (EV) and 16.0% fall in the number of deals completed. The drop-off in 2016 has been more pronounced in the middle market due to the lack of big-name transactions and deals with EVs of greater than $10 billion that have been increasingly responsible for deal value figures above the upper middle market (UMM). Median deal size in the middle market through 3Q came in at $128.6 million, down from $133 million last year and $150 million in 2014. Smaller deal sizes can be partially attributed to the prevalence of add-on transactions, which now make up 64% of all US buyout transactions (including those transactions above the UMM). We also saw more niche, specialist funds raising capital last year, and as those firms start to put that capital to work, they are increasingly finding value in the lower middle market (LMM). The lofty EBITDA multiples and heightened competition for companies in the UMM range and beyond has forced many investors to seek value elsewhere. 544 deals with an EV between $25 million and $100 million have been completed thus far in 2016, totaling $28 billion in aggregate value. This represents a 6.9% YoY decrease in the number of transactions, but a simultaneous 17.2% pop in the value of those deals across the same period.

Middle-Market PE

There is a popular belief that deal flow slows in a presidential election year, as investors wait to see if there will be any political changes affecting the economy. However, our dataset shows this not to be the case. middle-market PE deal flow tends to follow the broader economic trends of the time, not any sort of political speculation. In 2008, deal flow fell as the financial crisis was still unfolding. In 2012, middle-market activity grew as it had for the previous two years as part of the post-crisis recovery. This year is poised to see a drop in activity, though mostly due to market fundamentals that were in play long before the political environment became as uncertain as it may appear today. In addition, PE transactions are typically in play for months at a time, so we think the base-case scenario managers use to model out potential deal outcomes will likely have already incorporated a shift in the government landscape. At the very least, we think managers have incorporated a slowergrowth future into the frameworks they use to evaluate targets. Thus, we don’t expect deal flow trends to change dramatically through year-end.

Middle-Market PE

Middle-Market PE

Poised For Growth

Lower-middle-market activity

Middle-Market PE

Gradual Downturn

Core-middle-market activity

Middle-Market PE

A Sharp Decline

Upper-middle-market activity

Middle-Market PE

See the full report here.


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