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A panel at The Deal's M&A Outlook 2008 conference at the Ritz-Carlton, Battery Park in New York City Wednesday moderated by The Deal senior editor Vyvyan Tenorio weighed in on the impact of the credit crunch on the middle market, what it's done to growth and cyclical deals, and the resilience and volume of the middle market. The panelists Steven Dresner, president of Dresner Partners; Michael J. Lyons, senior managing director at Lincolnshire Management Inc.; Robin Marshall, a partner at 3i Group plc; and Adam D. Sokoloff, managing director and head of financial sponsors and private capital group for Jefferies & Co.; generally agreed that turmoil in the credit markets hasn't hit the middle market as hard as it has the larger private equity deals.
"In August when things started turning, there was a slight change as some of the lenders were ratcheting things down, but other than that we haven't seen major changes in the debt markets [for middle market deals]. The middle market remains very fluid, and our firm is still very busy," said Lincolnshire's Lyons. "The middle market never got to the very high multiples seen in the larger buyout market, where multiples reaches 8 times or 9 times Ebitda. The middle market never really got past 7 times Ebitda."
Lyons said there's an amazing amount of volume in the middle market. Boutique investment banks are out there finding these companies and matching them up with private equity. 3i's Marshall agreed, but he thinks that there is little chance that things will continue on as they have been, commenting that to say the middle market is going to just sail through all this is risky. What's to come is hard to say, but it will certainly be different from what's happened in the last 18 months. In spite of the credit crunch, 3i's portfolio companies are in good shape. "Our portfolio is probably in the best shape it's ever been," Marshall said, based on previous results. He added that he couldn't comment at this moment due to 3i's close period. Speaking of its portfolio, Lincolnshire's Lyons said, "I don't think we've seen the full impact yet." He thinks that from a credit-specific perspective, the middle market is going back to where it was 12 months ago. The middle market is coping with it, but in the future it will be hard to tell, he says. The credit crunch is a specific event, but with a weakening out look, increasing commodity prices, weakening dollar, it's hard to tell exactly what the impact will be. Sokoloff added that "we've come to a period where people feel they should pay a little less for a business" but that hasn't really happened for the growth opportunities, which remain in high demand. One of his main concerns is the speculation that things are back to normal. "I don't think we're back to normal," Sokoloff said, adding he believes the credit situation can impact the economy and ultimately all markets. Jefferies is seeing sponsors being extremely focused on "who's owning their paper." He also added the the high-yield market is in better shape than the leveraged loan market, but you still see a hesitation on the part of sponsors Increased competition "The United States is basically on sale," Dresner said, and that people are really starting to look at buying companies in the U.S. "There's a massive change in the middle market" Marshall added. Non-U.S. and strategics are now looking at smaller deals, but on the flipside, Lincolnshire is looking at deals internationally. Middle-market firms are also seeing new competition from large PE firms and VC firms: venture capitalists moving upmarket in tech Marshall said, and some bigger players moving down market. Private equity firms are looking to find more ways to invest capital, Sokoloff said. They're dipping down, he said, but there's tremendous knowledge, huge infrastructure that they can take advantage of around consolidation and putting more money to work. Still, he believes that large firms won't "dip way down" into something that won't have an impact on their portfolio, but will look globally instead. — Carolyn Murphy See more M&A Outlook 2008 posts Categories Deal Video
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