3Q 2023 Private Equity in the Middle Market
Navigating Middle Market Economic Headwinds
The Middle Market private equity space faced significant challenges in 3Q 2023 as rising interest rates and limited access to debt created bottlenecks in deal-making. Despite these hurdles, the sector still managed to close deals, though at lower multiples and valuations. A notable trend was the increased activity in founder-owned businesses, which helped sustain deal flow as larger, PE-backed companies held off on transactions due to valuation constraints. Fundraising also outperformed expectations, driven by investors seeking differentiated return strategies that rely less on leverage.
Strategic Buyers Dominate
Deal activity in the Middle Market reached a six-year low in 3Q 2023, with total deal value and count dropping significantly. Despite this decline, the market now represents a larger share of overall buyout activity, highlighting its relative resilience compared to the broader market. Strategic buyers, rather than financial sponsors, drove most of the deal flow, accounting for over 92% of acquisition activity. The ongoing contraction in deal activity is attributed to a combination of rising interest rates, a shortage of willing lenders, and the widening bid-ask spread that favors buyers.
Valuation and Economic Outlook: A Glimpse into 2024’s Middle Market
Valuations in the Middle Market showed mixed results in 3Q 2023, with EV/EBITDA multiples continuing to contract while EV/revenue multiples began to stabilize. The economic environment remains challenging, but there is cautious optimism heading into 2024, with executives expecting GDP growth and improved market conditions. As Middle Market private equity firms sit on substantial reserves of dry powder, there is potential for a rebound in deal activity if economic conditions stabilize. The focus remains on strategic transactions that can navigate the current financial landscape and leverage private credit options to close funding gaps.