The Lower Middle Market: 2Q22
Welcome to the latest edition of The Lower Middle Market. We’re the only news source tracking lower middle market M&A. Our goal is to keep you up to date on what’s happening in the market by highlighting the latest news, transactions, and commentary.
Cultural Literacy and Capital Markets in the Middle Market
Before we get to recent lower middle market activity, we want to share a couple of Harvard Business Review articles that we came across.
The first is an article from 2021 titled “Bridging the Gap Between Capital Providers and Midsize Companies”. The article’s author, Richard Price of PQ Capital Suite, points out that when it comes to capital markets the lower and middle market is vastly underserved due to a confluence of dynamics. For one, smaller companies tend to have less financially sophisticated owners and C-suite executives who are preoccupied with operating demands. There’s also a lack of M&A experience in lower mid-market business leaders leaving them in the dark when it comes to finding the right buyer or target during an M&A process.
On the banking side, loans at this end of the market tend be more expensive from an interest rate and covenant perspective when compared to larger companies. Additionally, there’s apprehension from word getting out that a company is shopping around to other local banks leaving them with the possibility of zero funding options. From an M&A perspective, only one in five sellers uses an investment banker. Richard explains this is partly due to sell-side advisors who charger higher success fees to compensate for participating in smaller deals. There’s also a lack of perceived value add from these advisors, as only one in ten deals get done.
As a result of these inefficiencies, many companies in the market default to the status quo of sedentariness when it comes to capital transactions. Technology and innovation is one way to bridge the gap between capital provider and small to mid-sized companies. There’s a number of companies trying to help. We at PrivSource are happy to play our role.
You can read the full article here.
The second article from HBR is titled “To Make Deals in the Middle Market, Private Equity Needs Cultural Literacy”. The article, co-authored by Nancy Langer and Sharon Heaton of sbLiftOff, discusses how cultural literacy is one of the most critical ingredients in achieving successful results in middle market M&A.
Nancy and Sharon highlight that there are two main differences in the cultural world between middle market business owners and private equity professionals. The first is differences in education, where many business owners don’t have advanced degrees or even college degrees while PE professionals tend to have MBAs from a concentrated pool of top-tier universities. The second main difference is a lack of M&A experience on the part of business owners.
What can both sides due to help bridge the gap? PE professionals should focus on speaking the language of business owners by being relatable. It’s also crucial to keep in mind that financial considerations are only part of the many factors that owners consider when determining who to sell to. Often times company and employee legacy are extremely important. For business owners, engaging with a sell-side advisor can help professionalize the process and avoid time-consuming and unstable negotiating, which is appreciated by private equity firms.
You can read the full article here.
Recent Lower Middle Market Transactions
The following is only a sample of recent transaction data. You can find the full list by clicking here.
Automotive related deal making flourished in recent months:
Huron Capital’s Addictive Desert Designs Acquired Rago Fabrication Link
MiddleGround Capital’s Race Winning Brands Acquired TPT Solutions Link
Skylark Private Equity Partners-backed USA Automotive Partners Acquired Caldwell Automotive Partners Link
An Investor Gruop Led by Brookside Capital Partners, Tecum Capital, Patriot Capital Invested in TopDown Link
MPE Partners Announced the Sale of dlhBOWLES to ABC Technologies Link
Everside Capital Partners and SJ Partners Invested in CentralBDC Link
BRS & Co.’s Tolemar Platform Completed Three Ad-On’s in the UTV, ATV and Motorcycle Markets Link
While, healthcare deals continued to pick up steam:
Argosy Participated in the Recap of Specialty Care Management Link
VSS Capital Partners Sold Caravan Health to Signify Health Link
ICV Partners Expanded it’s Urgent Care Platform Link
Atlantic Street Capital Expanded its Orthopedic Platform Link
Blue Sea Capital Invested in Specialty Smile Partners Link
Enhanced Healthcare Partners Invested in Vytalize Health Link
HCAP Partners Invested in Nurse Staffing Company, FleetNurse Link
Varsity Healthcare Partners-backed Emergency Care Partners Expands to Lake Havasu with Acquisition of Arizona Emergency Medicine Specialists Link
Bow River Capital Participates in Recap of Home Services Company, Amazing Care Link
Recent Lower Middle Market Fundraising
Freeport Financial Closes 5th Direct Lower Mid-Market Lending Fund at $1.5 Billion Link
Havencrest Closes on its Second Fund Focused on LMM Healthcare Companies Link
Rallyday Partners Closes $205 Million Sophomore Fund Link
Coral Tree Partners Closes Inaugural Fund at $470 Million Link
Vance Street Capital Closes $532.5 Million Third Fund Link
Great Point Partners Closes Fourth Health Care Growth Buyout Fund at $506 Million Link
Compass Group Equity Partners Closes $255 Million Fund Link
Plexus Capital Raises More Than $500 Million for Fifth Fund Link
NextGen Growth Partners Closes Second Fund Above $100 Million Link
NovaQuest Private Equity Closes Fund II at $500 Million Link
Black Bay Energy Closes Second Fund at $210 Million Link
Benford Capital Partners Closes Oversubscribed Fund II at $200 Million Link
Trivest Closes Trivest Fund VII and Trivest Discovery Fund II Link
Tyree & D'Angelo Partners Closes Fund III at $350 Million Link
Four Steps to Building a Better Board at Lower Middle-Market Companies Link
Nexa Equity Founder on the Gap at the Lower End of the Market for New Investors to Enter Link
Small Market Deal of the Year: Argosy Capital Partners and Paragon Link
Q1 US PE Breakdown Link