Middle market

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ARE THINGS LOOKING UP?

June 10: Midmarket healthcare execs expect deals: In April and May CIT Group Inc. (NYSE:CIT) survey ed 101 executives at middle-market healthcare companies on their outlook. What do they expect?For one thing, they expect growth. The report says 60% expect revenue to increase in the next year. They also expect to pay for it: More than  40% say they'll increase capital spending this year. - Kenneth Klee

This, after we learned May 20: Midmarket pharmaceutical deals could heat up. 

June 3: Midmarket deals shine but jobs report a downer; M&A midmarket roundup: AIG, Intuit and more; and Midmarket media M&A sluggish in May.

May 29: Counting on trouble: A conversation with Gregory Segall of distressed specialist Versa Capital Management. - Vyvyan Tenorio

May 21: Signs of life: A conversation with Robert Snape, head of consumer and retail M&A at middle-market boutique Scott-Macon. - Demitri Diakantonis

May 20: Middle-market fashion M&A still in vogue: While M&A in most industries is so last season, the fashion world remains a hot spot for deal activity. At least that's the experience of the investment bank Net Worth Solutions Inc., whose fashion and retail clients post sales in the $50 million to $250 million range. - Suzanne Stevens

May 4: The soul of the middle market: Rejected by the military, Mike McMahon began a financial career; Euan Rellie (husband of Lucy Sykes), co-founded Business Development Asia, inspired by "Barbarians at the Gate." The Deal profiles nine dealmakers from seven firms: Read on for more.

March 9: Light at the end of the tunnel?: A pair of studies indicate there could be signs of life in the middle market. A CIT Group Inc. report said four of five middle-market executives expect the financial crisis to bottom out in 2009, with 28% of these expecting the end to come within six months. (Read more in The Deal Pipeline.)

March 6: The midmarket kingdom: Inbound private equity in China is down, but prices have fallen, and prospects look up. Go figure. - Thomas Zadvydas

Feb. 6: Got cash?: If not, don't bother looking at the middle market, where financing is tighter than ever. - Demitri Diakantonis and Nathaniel E. Baker

Or consider the alternative. ... A middle-market oasis of sorts: In tough financing markets, the Small Business Administration's debenture program suddenly looks awfully appealing. - Vyvyan Tenorio

Jan. 15: Drilling down: As middle-market buyout shops mine for energy deals, creative deal-sourcing strategies are key. - Thomas Bonney, CMF Associates

Dec. 12: Not even a trickle: Middle-market deal activity has precipitously fallen, but don't expect it to bounce back until the consumer does. - Nathaniel E. Baker

Dec. 9: Morgan Keegan acquires Revolution: Memphis-based investment bank Morgan Keegan & Co. acquired Boston investment banking boutique Revolution Partners LLC, which specializes in mergers and acquisitions and private capital-raising services to middle-market technology companies. - Baz Hiralal

Dec. 1: Hunters and hunted: Falling energy prices and economic uncertainty have set off consolidation in the midmarket oil patch. - Thomas Zadvydas

** LIVE from The Deal's M&A Outlook 2009 Conference. PLUS Deal Video **

John D.Howard, CEO of Irving Place Capital; Foley's Rothman and Guardian's Turner on 2009 middle-market transactions; Rothman and Peskoff on middle-market valuations; Houlihan's Crawford and Lincolnshire's Callahan on distressed assets; Experts give quick take on middle-market dealmaking; Irving Place Capital's Howard on PE deals in the middle market

Deal Video:Robert W. Baird's Lanser on middle-market M&A in 2009; Berkery Noyes' Joseph Berkery on middle-market M&A; CIT's Gregg Smith on middle-market dealmaking

TECH DEALS ARE GETTING DONE, BUT A CHILL DESCENDS ON THE MIDDLE MARKET

Nov. 12: M&A stuck in the middle: Where's the M&A action, now that blockbuster deals are dead? Try the middle market, where deal volume is holding steady for the quarter, although valuations are down. - Alain Sherter

See also: Middle-market tech deals getting done; Tech M&A buyers shun big deals, turn to midmarket

Oct. 17: Main Street blues: After resisting the chill, the middle market begins to get the shakes. - Vyvyan Tenorio

Oct. 10: Sinking BDCs: Buoyed by hot markets, business development companies are fading as the chill descends. - Vyvyan Tenorio

Oct. 3: Welcome to purgatory: Amid a slowdown, middle-market dealmakers, like everyone else, wait for the next blow. - Nathaniel E. Baker

Nov. 7: Competitive hedge: Here's a way out of the financial crisis for middle-market companies.  - Perrie M. Weiner, DLA Piper

Aug. 5: Middle-market memo on M&A: Three regulatory factors may drive an increase in middle-market deals before year's end. - Mitchell S. Ames, Pepper Hamilton

July: LLR Equity raises $800M for midmarket fund and Castle Harlan triples its money on sale of AmeriCast; Accretive Exit Capital closes $125M secondary fund

July 22: Middle-market dealmakers weigh in on 2008 M&A: One year ago, 93% of middle-market M&A executives surveyed by the Association for Corporate Growth and Thomson Reuters rated the deal environment as good or excellent. Today, the number is 43%. - Suzanne Stevens

JUNE 2008: DEALS, AND THE MIDWEST MIDDLE MARKET IS HOT

June 13: Abroad view: Taking a look at the new global face of middle-market M&A. - Jim Lawson and Hans Peter Peters, Lincoln International

Barclays Private Equity bids for Germany's Computerlinks; Quadrangle Group to buy Greenfield Online for $426M; Boston Ventures drives away with NASCAR team

June 2008: It seems the Midwest is a hotbed for middle-market activity. Midmarket investment bank Houlihan, Lokey, Howard & Zukin Inc. has a huge presence in Minneapolis. Columbus, Ohio, is the birthplace of many restaurant chains and, in turn, a self-fulfilling deal dynamic; Chicago midmarket lender Madison Capital Funding LLC's business thrives during times of economic uncertainty; and Cleveland is home to at least a dozen midmarket private equity firms.

Meanwhile, several dealmakers weighed in on the state of the middle market at The Deal's Private Capital Symposium in mid-May. See the footage:

• DLJ Merchant Banking Partners' Steven Rattner on why it's easier to create value in midmarket companies, and on the effect of the economy on middle market deals today.
  
• New Mountain Capital LLC's Mathew Lori and Morgan Stanley's Alan Jones on how leveraged lending markets are affecting middle-market valuations, a topic also tackled by a panel that included Fenway Partners Inc.'s Marc Kramer, Pepper Hamilton LLC's James Epstein and Rattner.
• Epstein on trends in middle market investing, namely large-cap funds dipping down and deals with more equity.
• The insights are in a way a far cry from a panel at The Deal's 2007 PC conference, which discussed how many firms had abandoned the midmarket to niche investors.

Of course there are some real concerns. Earlier in May, The Deal's Vyvyan Tenorio wrote:

Just when the middle market was looking like a good place to be for private equity, financial buyers are getting spooked. The reason? They have had to work much harder to obtain financing commitments and to provide certainty of closing.

And given the credit environment, several private equity firms got together to launch midmarket lender Tygris Commercial Finance Group Inc., financial services-focused private equity firm Aquiline Capital Partners LLC of New York announced in late May. Aquiline tapped New Mountain Capital LLC and TPG Capital to also serve as lead investors, with other investors include Diamond Castle Holdings LLC and Hamilton Lane. Tygris had more than $1.75 billion in equity committed to offer liquidity and growth capital to U.S. midmarket companies.

And credit concerns haven't stopped fundraising. Meanwhile, private equity firm Pfingsten Partners LLC closed a $525 million midmarket investment vehicle, it said in mid-May. The firm's fourth fund exceeded its original target of $400 millon illustrating demand for midmarket investments. The news came days after tech-focused buyout shop Silver Lake held the final close of its first midmarket fund, a $1.1 billion vehicle. Midmarket dealmakers kicked off April with a flurry of news, from record-breaking new funds and investments to deals for small, well-known companies. 

• TPG unveiled April 8 an $800 million investment in Russian pharmaceutical distributor SIA International, said to be the biggest-ever PE investment in a Russian company.
• April 7, Advent International said it had raised a $10.4 billion global fund, which it called the largest-ever focused on the midmarket.
  
• The same day, Neilsen Co. revealed it had bagged IAG Research Inc. for $225 million, and Discover Financial Services said it would pay Citigroup Inc. $165 million for Diners Club International.
  

And in an April 7 Special Report, The Deal profiled several "Faces of the middle market," or "more than a dozen personalities, many of which recall an era when folks rolled up their sleeves, got their hands dirty and didn't rely on debt to do the job for them."

ROUNDING OUT THE FIRST QUARTER

Back in March, food deals highlighted strong domestic midmarket M&A activity, while midmarket consumer products M&A was in a tailspin. New Mountain and SFW Capital raised new funds, while panelists at DealFlow Media Inc.'s Distressed Debt Conference 2008 agreed the credit crunch was a boon for midmarket and turnaround firms.

"Looks fine down here," headlined a Deal newsweekly column Feb. 8 from John E. Morris on the vitality of the middle market given the state of the credit markets. Fundraising and dealflow continue to chug along.

In February, the latest PE-backed midmarket company to make news is Dallas-based restaurant chain Dave & Buster's Inc. Wellspring Capital Partners LLC has it on the block, sources confirmed for The Deal's Luisa Beltran Feb. 12. It could command a price tag of up to $600 million, which is what Wellspring hoped to fetch when it first hired Jefferies & Co. to explore a sale back in August. The list of possible bidders is long, but includes: Castle Harlan Inc., Centre Partners Management LLC, Sun Capital Partners Inc. and Bruckman, Rosser, Sherrill & Co. LLC.

In fact, for the week of Feb. 11 alone, Sun Capital, Dell Inc., Yahoo! Inc., Tyco International Ltd. and others cranked out a slew of midmarket deals. As Morris noted:

At the lower end of the scale, deals under $250 million, deal announcements peaked in October, well after the credit markets had cracked, and the average monthly value of announced deals from July through this January was only 15% below the average in the booming first half of 2007, according to Thomson Financial. The average number of deals per month was down less than 7% in the second span. ...

There was more of a slowdown among transactions between $250 million and $1 billion. But even there, $3.6 billion of deals have been announced each month, on average, since July, down only 36% from the first half. Deals per month were down only 25%-hardly a collapse like the disappearance of mega-buyouts. The January figures remained respectable for all deals under $1 billion.

FUELING UP

Morris in February also pointed to several midmarket buyout funds shoring up, including: Jordan Co. LP ($3.6 billion), Roark Capital Group ($1 billion), Pegasus Capital Advisors LP ($750 million) and Sorenson Capital Partners ($400 million). For more, see a related chart.

Looking ahead to 2008, Tenorio weighed in Jan. 4 on the continued strength in the sector. "Overall, the middle market is proving less sensitive to the credit woes to which larger deals have succumbed, although any optimistic predictions are tempered by concerns over the economy."

One prediction she noted is that business development companies, or BDCs, which have access to capital markets, should become more visible. Further, she wrote: "David Vorhoff, a managing director at McColl Partners LLC of Charlotte, N.C., said his firm observed that companies under $100 million in enterprise value, which are typically sold at a discount, showed narrower spreads last year with bigger companies. This was partly attributed to the preponderance of new midmarket buyout funds that have emerged in recent years, as well as a migration to smaller-sized deals where buyers see more operational upside and organic growth opportunities."

Back in October, dealmakers expressed optimism about the middle market's outlook despite what looked like an imminent downturn overall. The Deal's David Carey profiled Lehman Brothers Merchant Banking Group's PE chief Michael J. Odrich in October, who dished on his strategy of staying in the middle of the market, while Avista Capital Partners' Thompson Dean was optimistic about the outlook for midmarket investing, Tenorio noted.

And the middle-market deals that topped The Deal's list in 2007 for their significance proved no deal was too small for happy returns for investors like Wicks Group of Cos. LLC, Berkshire Partners LLC and Weston Presidio.

PUSHING THE ENVELOPE

As the price ceiling of the middle market has inched north, the landscape has taken on characteristics of the megabuyout playing field. Not immune to the credit crunch, the middle market has felt the heat since the summer with less liquidity and tougher terms. Tenorio examined in a Deal newsweekly story Oct. 1 how the landscape has changed and what it means for dealmakers. In the wake of the crunch, middle-market deals were dominating the acquisition landscape, Dealscape's Gerald Magpily pointed out: For the week of Oct. 22, eight of the top 10 domestic deals and nine of the top 10 international deals were in that realm, he noted.

While opinion seems optimistic, what's in store may still be hard to say. Tenorio wrote in July:

Traditionally, the midmarket falls first and farthest in a credit crunch. Has that pattern reversed itself? How far-reaching will the impact of the credit crunch prove to be? Opinion is divided. ...

As buyout veterans would claim, the best deals historically are those that have come in times of uncertainty. In recent years, excess liquidity has lulled investors into a false sense of security. If the shakeout in the credit markets indeed translates into a reality check -- and time will tell whether the excess liquidity gets soaked up -- the old-fashioned guys will prevail. In short, we're back to basics.

THE BUILD UP

Before the markets froze, seller-friendly tactics had descended in dealmaking, forcing sponsors and lenders to assume more risk than ever before, with fully financed commitments, the lack of "financing outs" and speed to completion just a few of the factors collectively making or breaking deals earlier in the hot 2006-2007 market. Tenorio tackled the issue June 8. The deals were ballooning larger and getting more competitive, she wrote.

Sponsors are writing larger equity checks, and competition in the debt markets has intensified. The broad syndication market has large financial institutions, including hedge funds, mutual funds and sundry investors, all competing on a monumental scale for a piece of investment-grade senior debt or junior capital.

Further, eager new entrants emerged at the top end of the middle market, "finding their way into all levels of the capital structure," as well as business development companies and other hybrids, coming in offering both equity and debt.

The fully financed mentality emerged as just the latest example of the interplay between the megabuyout realm and the middle market. As a panel at The Deal's Private Capital Symposium said in April, the definition of the "middle market" is constantly changing, and while the price ceiling was on the rise and megabuyouts rolled on with upper-bracket middle-market players going after those multibillion-dollar buyouts, the door opened for middle-market players to get in on bigger deals.

Panelists at subsequent The Deal conferences rang in on the credit crunch impact on the middle market.

In what isn't the first, and what surely won't be the last of its kind, Private Equity International magazine in May 2007 released a ranking of the world's 50 largest PE firms by direct investment. While Carlyle Group, Kohlberg Kravis Roberts & Co. and Goldman, Sachs & Co. top the list, more than a handful of middle-market-focused firms also made their way into the spreadsheet, having raised billions in capital to advance their rankings.

RUN OF THE MIDDLE MARKET

In the arena, the range in deal size is dramatic, and firms are getting in and cashing out, as well as buying and selling companies from each other. Here's a sampling of middle-market dealmaking activity as of May from a few that graced PEI's list:

• With $11.4 billion, General Atlantic LLC is No. 18 on the list. And though it has participated in some $1 billion deals -- including what's shaping up to be a fight for microelectronics maker Aeroflex Inc. -- some of its midsized deals include investments in equity trading platform Archipelago Holdings Inc. in 2003 and 2004 and cashing in royally when the company went public and, later, was acquired by NYSE Group Inc.
  • In January, GA invested $66 million in outsourcing specialist ServiceSource Corp., and days later, it took a majority stake in digital marketing, advertising and Web design firm AKQA for an undisclosed amount, though a source told The Deal it had hoped to sell out for $250 million.
• First Reserve Corp. follows, and having raised $10.1 billion, it is No. 22 on PEI's list. First Reserve has recently cashed out of a few investments.
  • Alongside Odyssey Investment Partners LLC, the firm agreed in mid-March to divest energy equipment maker Dresser Inc. to Riverstone Holdings LLC in a deal valued at $1.5 billion, a source told The Deal.
  • First Reserve unveiled plans to cash out of T-3 Energy Services through a secondary offering, seven years after forming the oilfield equipment maker. While the offering had yet to price, the firm was poised to pocket about $119 million in mid-April based on trading prices.
• American Capital Strategies Ltd., with $9.57 billion raised since 2002, in January said it paid Toronto-based Onex Corp. $411 million for inventory services provider WIS International and in March announced a $160 million investment in online media and search company Geosign Technologies Inc.
• London-based Charterhouse Capital Partners LLP, at No. 24, acquired a majority stake in Drive Assist UK Ltd., which provides temporary replacement vehicles for people in car accidents, from TA Associates, No. 39, for $500 million.
  • Weeks later, TA announced it paid $175 million for disease management company Alere Medical Inc.
• Advent International, whose David Mussafer in January told The Deal there is much opportunity in the megafund's wake, stood to gain nearly $240 million through a secondary offering in software group Aspen Technology Inc. and to quadruple its initial investment, a regulatory filing indicated in early April.

Other middle-market firms to make the list include Berkshire Partners, GTCR Golder Rauner LLC and Summit Partners. So what's so great about the middle market and why do so many people want to go there?     

MASS APPEAL

In The Deal's annual special report Faces of the Middle Market, 2007's crop of ambitious youngins has a characteristic unlike others in the past, Tenorio noted:

It's the lure of the middle market as their workplace of choice. Many young professionals typically run the gamut of work experiences in the early years -- big firm, little firm, consultant to big companies and little companies -- but given the opportunity to choose, many of our Faces say the middle market offers them the greatest job satisfaction. 

It is there that close ties are fostered between entrepreneurs and senior executives, a good deal of specialization lies, principals are often low-key, and an opportunity to get ahead lies. 

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