What’s private equity’s future in the middle market?
Deals continue, focus sharpens
Many are wondering how recent volatility in the capital and lending markets will affect private equity activity. Private equity funds are still attracting capital at record rates, but loan volume to private equity funds has slowed. “With credit tighter, it may be harder to get deals done, so funds will approach deals more carefully, with a sharper focus on due diligence on both the buy and sell side,” says Michael Grossman, a director with RSM McGladrey’s transaction support services practice.
Tighter focus on value
Private equity deals are primarily EBITDA driven, but there will be more attention to issues like customer concentrations, sustainability of margins and growth potential as funds look to normalize earnings. Quality of earnings will be extremely important.
More attention to integration
Many funds focus in an industry and make a lot of add-on deals, so the ability to integrate operations is vital. Areas like IT systems, culture and personnel policies will go under the microscope.
Ramped up sell-side due diligence
Funds do deals all the time, and have established relationships with third party providers for everything from valuations to quality of earnings to working capital adjustments. Target companies should get the same quality of advice to protect their interests.
“For the middle market companies RSM McGladrey serves every day, private equity fills a vital role as aging baby boomers look for an exit strategy or as their companies look to raise capital. For investors, it provides a real alternative to the public markets. Middle market deals aren’t as highly leveraged as some of the mega deals we’ve seen, so private equity activity in this sector should remain strong,” concludes Grossman.
