Middle-market PE Buyout Cycle continued to decline in step with the broader PE marketplace midway through 2016. $180 billion was invested across 925 completed transactions in 1H 2016, equating to an 8.5% decline in total deal value compared to the second half 2015, and a drop of more than 14% when looking at total volume during the same period. On a quarterly basis, 2Q total deal value was down just under 3% Q on Q with volume sliding roughly 8% during that same period. While these quarterly figures reinforce the continuous decline we’ve seen across the PE world, they do point to the resilience of the US middle market, which saw activity decline at a much slower pace than what was seen across the broader PE marketplace.
The lower middle market experienced the most pronounced quarterly decline in 2Q, an interesting event given the surge we saw LMM activity undergo during the first quarter of the year. As auction processes have driven prices higher across businesses of less than optimal quality, we saw a notable amount of PE players move lower down the MM spectrum to source less competitive, and ultimately more affordable transactions. Such deals have also traditionally served as attractive add-on opportunities, yet the buy-and-build angle has been used t a record level in recent quarters, and we think part of the decline in LMM 2Q deals may be correlated to many sponsors needing to pump the brakes and focus inward. With both economic, revenue and earnings projections
subdued, GPs need to ensure their portfolio company management teams are ready to drive growth organically. Leverage levels will also likely receive more attention from owners, and thus,
certain add-on deals might not seem as attractive in an uncertain economic backdrop as in a high-growth world where the ability to service debt over time wouldn’t be a heightened
While LMM buyout activity slipped, the core and upper middle market size buckets performed stronger than what we anticipated last quarter. Transactions valued between $100 million and $500 million actually saw volume jump 22% on a quarterly basis and transactions valued between $500 million and $1 billion saw volume spike more than 36% during the same period. Although the expectation has been to see a continued surge in LMM deals, 1Q did see dealmakers pull back from committing large sums of capital as we emerged from a volatile 2H 2015, and with that, the 2Q surge in these size buckets could be attributed to managers finally completing lengthier diligence processes that extended closing times.
REO Capital provides this information from Pitch Book.