Private equity middle market refers to the segment of the private equity market that invests in companies with an enterprise value between £10 million and £300 million.
This segment is also referred to as the “lower mid-market” or “mid-cap” market.
Private equity middle market investors typically take a controlling stake in the companies they invest in and work closely with management to help grow the business.
Private equity middle market is an important part of the private equity industry, as it provides capital to companies that may not have access to traditional sources of funding, such as public markets or bank loans.
Private equity firms in the middle market seek to generate returns for their investors by improving the operations and financial performance of the companies they invest in, often through operational improvements, cost-cutting measures, and strategic acquisitions.
Key Takeaways
- Private equity middle market invests in companies with an enterprise value between £10 million and £300 million.
- Private equity firms in the middle market seek to generate returns for their investors by improving the operations and financial performance of the companies they invest in.
- Private equity middle market provides capital to companies that may not have access to traditional sources of funding.
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Understanding Private Equity Middle Market
Private equity (PE) is a type of alternative investment that involves investing in private companies or buying out public companies, often with the goal of improving operations and increasing profitability.
The middle market refers to a segment of the economy that includes companies with annual revenues between £10 million and £1 billion.
Middle market private equity (MMPE) refers to investments made in these mid-sized companies.
Private Equity Middle Market Guide
The middle market is divided into two segments: the lower middle market and the upper middle market. The lower middle market includes companies with annual revenues between £10 million and £100 million, while the upper middle market includes companies with annual revenues between £100 million and £1 billion.
The U.S. middle market is the largest in the world and is estimated to include over 200,000 companies. MMPE investments in the U.S. middle market have been growing steadily over the past decade, with over 3,000 deals completed in 2021.
MMPE firms typically invest in companies that have a strong market position, a proven track record of revenue and earnings growth, and a clear path to further growth and profitability.
They may also target companies that are undergoing a transition, such as a change in ownership, a new product launch, or a restructuring.
MMPE firms may provide capital to support growth initiatives, such as expanding into new markets or developing new products. They may also provide operational expertise and strategic guidance to help companies improve their operations and increase profitability.
In summary, MMPE is a type of private equity investment that targets mid-sized companies with annual revenues between £10 million and £1 billion.
MMPE firms typically invest in companies with a strong market position and a clear path to growth and profitability, and may provide capital and operational expertise to support growth initiatives.
Key Players in the Market
The middle market private equity space is dominated by a few key players, including Blackstone, KKR, Carlyle, TPG, CVC, Ares, and other private equity firms. These firms have a significant amount of capital under management and have established themselves as leaders in the industry.
Blackstone is one of the largest private equity firms in the world, with over $630 billion in assets under management. The firm has a strong presence in the middle market and has completed numerous successful investments in this space. Blackstone has a reputation for being a disciplined and savvy investor, and is known for its ability to identify attractive investment opportunities.
KKR is another major player in the middle market private equity space, with over $252 billion in assets under management. The firm has a history of investing in a wide range of industries, including healthcare, technology, and consumer goods. KKR has a reputation for being a value-driven investor, and is known for its ability to identify undervalued assets and turn them into profitable investments.
Carlyle is a global private equity firm with over $276 billion in assets under management. The firm has a strong presence in the middle market, and has completed numerous successful investments in this space. Carlyle has a reputation for being a patient and disciplined investor, and is known for its ability to create value through operational improvements.
TPG is another major player in the middle market private equity space, with over $103 billion in assets under management. The firm has a history of investing in a wide range of industries, including healthcare, technology, and financial services. TPG has a reputation for being a creative and innovative investor, and is known for its ability to identify unique investment opportunities.
CVC is a global private equity firm with over $118 billion in assets under management. The firm has a strong presence in the middle market, and has completed numerous successful investments in this space. CVC has a reputation for being a collaborative and hands-on investor, and is known for its ability to work closely with portfolio companies to create value.
Ares is another major player in the middle market private equity space, with over $227 billion in assets under management. The firm has a history of investing in a wide range of industries, including healthcare, technology, and financial services. Ares has a reputation for being a disciplined and focused investor, and is known for its ability to identify attractive investment opportunities.
Overall, these key players in the middle market private equity space have established themselves as leaders in the industry. They have a significant amount of capital under management, and have a history of completing successful investments in this space. Investors looking to gain exposure to the middle market should consider these firms when making investment decisions.
Investment Strategies
Private equity middle market investors typically invest in companies that are beyond the early stage but are still in the growth phase.
These companies are usually generating revenue and have a proven business model. The investment strategies employed by these investors are typically focused on revenue growth and increasing profitability.
One common strategy used by private equity middle market investors is to provide capital to help companies expand their operations and increase revenue.
This can involve investing in new products and services, expanding into new markets, or acquiring other companies to expand the company’s reach.
Another strategy is to use debt to finance growth. This can involve providing loans to companies to help them finance expansion or acquiring companies with existing debt. This strategy can be risky, as it can lead to high levels of leverage, but it can also provide high returns if executed correctly.
Growth equity is another strategy used by private equity middle market investors.
This involves investing in companies that are already generating revenue but need capital to accelerate their growth. These investments typically involve a minority stake in the company and can provide high returns if the company is successful in increasing revenue and profitability.
Private equity middle market investors also use leverage to increase their returns.
This involves using debt to finance the purchase price of the company, which can increase the potential return on investment. However, this strategy can also increase the risk of the investment, as the debt must be repaid regardless of the company’s success.
Overall, private equity middle market investors use a variety of investment strategies to help companies grow and increase profitability.
These Private Equity Middle Market strategies can involve providing capital, using debt to finance growth, investing in growth equity, and using leverage to increase returns.
Sector Focus
Private equity middle market investors often focus on specific sectors to maximise their returns. By concentrating on a particular industry, they can gain a better understanding of the market and identify investment opportunities that may not be apparent to others.
One of the most popular sectors for private equity middle market investors is healthcare. With an ageing population and increasing demand for healthcare services, there is a significant opportunity for investors to generate high returns.
Technology is another sector that is attracting a lot of attention from private equity middle market investors. With the rapid pace of technological change, there is a constant need for new products and services, providing ample opportunities for investment.
Business services, legal, financial services, education, real estate, and infrastructure are other sectors that private equity middle market investors focus on.
These sectors offer different investment opportunities, and investors will need to assess each sector’s risks and rewards before making a decision.
When investing in a particular sector, private equity middle market investors will often look for companies that have a competitive advantage. This could be a unique product or service, a strong brand, or a proprietary technology. By investing in companies with a competitive advantage, investors can increase their chances of generating high returns.
Private equity middle market investors will also look for companies with a strong management team. A company’s management team can have a significant impact on its success or failure. Therefore, investors will want to ensure that the management team has the necessary skills and experience to run the business successfully.
In conclusion, private equity middle market investors often focus on specific sectors to maximise their returns.
Healthcare and technology are two of the most popular sectors, but other sectors such as business services, legal, financial services, education, real estate, and infrastructure also offer investment opportunities.
When investing in a particular sector, investors will look for companies with a competitive advantage and a strong management team.
Deal Activity and Valuation
The UK private equity middle market saw a boost in deal activity in H1 2022, with 377 deals completed with a combined value of £20.7 billion, according to KPMG’s latest study of UK transactions involving mid-market private equity investors [1]. This level of activity has not been seen since H1 2017.
In contrast, the total value of deals in the overall UK private equity market decreased by 6% from £180 billion in 2021 to £170 billion in 2022, and volumes decreased by 16.5% from 1,850 in 2021 to 1,544 in 2022 [2].
Despite the decrease in overall deal activity, the middle market continued to thrive. The average deal size in the UK private equity middle market was £55 million in H1 2022, up from £49 million in H1 2021 [1].
The increase in deal activity and average deal size in the private equity middle market has also led to an increase in enterprise value. KPMG’s research found that deal multiples rose across the UK private equity market, from 8.7x earnings in 2020 to 9.6x in 2021 [1].
Overall, the UK private equity middle market has remained resilient despite the challenges presented by the pandemic. The increase in deal activity and enterprise value is a positive sign for the industry, and it will be interesting to see how the market develops in the coming years.
References
Exit Strategies
Exit strategies are a crucial part of the private equity investment process, as they determine the final return on investment.
Private equity firms typically exit their investments through a sale to a strategic or financial buyer, an initial public offering (IPO), or a recapitalisation. The choice of exit strategy in the private equity middle market depends on various factors, including market conditions, the company’s growth prospects, and the private equity firm’s investment objectives.
Exit activity has been robust in the middle market in recent years. According to a KPMG report, the UK mid-market private equity exit activity in H1 2021 was the highest since H1 2017, with 377 deals completed with a combined value of £20.7 billion.
Private equity firms are increasingly looking to exit their portfolio companies through IPOs, which offer the potential for higher returns and greater liquidity.
However, IPOs can be challenging in the middle market, as they require a certain level of scale and profitability. Private equity firms may need to work with the portfolio company to improve its financial performance and market position before pursuing an IPO.
Trade sales remain the most common exit route in the middle market, accounting for around 60% of all exits, according to a McKinsey report. Private equity firms typically sell the portfolio company to a strategic buyer in the same industry, who can benefit from synergies and economies of scale.
Recapitalisations are another private equity middle market exit option, where the private equity firm sells a portion of its stake in the portfolio company to a new investor while retaining a significant ownership stake. This allows the private equity firm to realise some of its gains while maintaining exposure to the company’s future growth potential.
Private equity firms need to carefully consider their exit strategy when investing in middle-market companies. They must evaluate the company’s growth prospects, market conditions, and potential buyers to maximise their returns. By focusing on creating value in the portfolio company and executing a successful exit, private equity firms can generate strong returns for their investors.
Performance Metrics
Measuring the performance of private equity investments is critical for investors to evaluate whether they are meeting their investment objectives and to determine whether to continue investing in the fund. Here are some of the most commonly used performance metrics in private equity middle market:
EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a popular metric used in private equity to measure the profitability and cash flow of a company.
Private equity investors often use EBITDA as a benchmark to evaluate the performance of their portfolio companies. A higher EBITDA indicates that the private equity middle market company is generating more cash flow and is more profitable.
Risk
Risk is another important metric that investors consider when evaluating private equity investments.
Private equity investments are typically considered riskier than traditional investments due to their illiquid nature and the potential for high volatility.
Private equity middle market investors evaluate the risk of a private equity investment by analyzing the fund’s track record, the investment strategy, and the underlying portfolio companies.
Net IRR
Net IRR (Internal Rate of Return) is a widely used performance metric in private equity that measures the rate of return on an investment over a specific period of time. Net IRR takes into account the timing and amount of cash flows, including capital calls, distributions, and the sale of portfolio companies. A higher net IRR indicates that the private equity investment has generated higher returns.
Private equity investors use a combination of these metrics to evaluate the performance of their investments and make informed decisions about future investments. It is important to note that these metrics are not the only factors that investors consider when evaluating private equity investments. Other factors, such as the fund’s investment strategy, management team, and market conditions, also play a crucial role in determining the success of a private equity investment.
Influence of Economic Factors
The private equity middle market is not immune to the influence of economic factors. Economic conditions such as economic uncertainty, rising rates, global financial crisis, and inflation can all have a significant impact on private equity investments.
During times of economic uncertainty, private equity firms may become more cautious and hesitant to invest in the private equity middle market.
This may result in a decrease in deal activity and a slowdown in the overall growth of the private equity middle market. However, some firms may see economic uncertainty as an opportunity to acquire undervalued assets and make strategic investments.
Rising interest rates can also have an impact on private equity investments. Higher rates can increase the cost of borrowing, making it more difficult for companies to finance acquisitions and other investments. This can lead to a decrease in deal activity and a slowdown in the overall growth of the middle market. However, some private equity firms may see rising rates as an opportunity to invest in companies that are better positioned to weather the economic storm.
The global financial crisis of 2008 had a significant impact on the private equity middle market. The crisis resulted in a decrease in deal activity and a slowdown in the overall growth of the market. However, the market has since recovered, and deal activity has returned to pre-crisis levels.
Inflation can also have an impact on private equity investments. Higher inflation can lead to higher costs for companies, which can impact their profitability and make it more difficult for them to finance acquisitions and other investments.
This can lead to a decrease in deal activity and a slowdown in the overall growth of the private equity middle market.
However, some private equity firms may see inflation as an opportunity to invest in companies that are better positioned to weather the economic storm.
Overall, economic factors can have a significant impact on the private equity middle market. Private equity firms must be aware of these factors and be prepared to adjust their investment strategies accordingly.
Environmental, Social, and Governance (ESG) Factors
Private equity middle market firms are increasingly integrating Environmental, Social, and Governance (ESG) factors into their investment strategies. ESG refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business.
Environmental factors refer to how a company interacts with the natural world, including its carbon footprint, energy consumption, waste management, and resource utilization.
Social factors refer to how a company interacts with its employees, customers, suppliers, and local communities, including its labor practices, human rights record, community involvement, and customer relations.
Governance factors refer to how a company is managed, including its board structure, executive compensation, shareholder rights, and transparency.
There is growing evidence that when investors integrate ESG considerations into their strategies, they achieve superior valuations and a host of positive outcomes. For instance, companies with high ESG ratings tend to have better operational performance, lower costs of capital, and higher stock price performance.
Many private equity middle market firms are now incorporating ESG considerations into their investment processes, due diligence, and portfolio management.
They are using ESG metrics and tools to evaluate potential investments, identify risks and opportunities, and enhance value creation.
However, there are still challenges and barriers that private equity firms face in integrating ESG factors into their investment strategies. These include a lack of standardization and transparency in ESG reporting, difficulty in measuring the impact of ESG factors, and the need for specialized expertise and resources.
In response to these challenges, many private equity middle market firms are partnering with ESG specialists, engaging with stakeholders, and adopting industry standards and best practices.
They are also developing their own ESG policies and frameworks, and reporting on their ESG performance to investors and other stakeholders.
Overall, the integration of ESG factors into private equity middle market investment strategies is a positive development that can lead to better investment outcomes and a more sustainable future.
Diversification in Private Equity
Private equity firms are constantly looking for ways to diversify their portfolio to manage risks and generate higher returns. Diversification can take many forms, including investing in different geographies, asset classes, or industries.
Geographic diversification involves investing in companies located in different regions or countries. This strategy can help private equity middle market firms mitigate the risk of economic downturns in a particular region or country.
For example, a private equity middle market firm that invests only in the United States may face significant losses if the US economy experiences a recession.
By investing in companies located in other countries, the firm can spread its risk and potentially generate higher returns.
Asset class diversification involves investing in different types of assets, such as equities, bonds, real estate, or commodities.
Private equity firms can also diversify their portfolio by investing in different stages of a company’s growth, such as early-stage venture capital or later-stage buyouts. This strategy can help firms generate higher returns by tapping into different sources of value creation.
Industry diversification involves investing in companies operating in different industries.
This strategy can help top private equity firms mitigate the risk of investing in a single industry that may experience a downturn. By investing in companies operating in different industries, the firm can spread its risk and potentially generate higher returns.
However, diversification also has its downsides. By investing in different geographies, asset classes, or industries, private equity funds may spread their resources too thin, making it difficult to achieve deep expertise in any one area.
Additionally, diversification can lead to higher transaction costs, as private equity firms need to spend more time and resources researching and analyzing potential investments.
In summary, diversification is an important strategy for private equity firms looking to manage risks and generate higher returns.
By investing in different geographies, asset classes, or industries, firms can spread their risk and potentially generate higher returns. However, diversification also has its downsides, and firms must carefully balance the benefits and costs of this strategy.
Role of Limited Partners in the Private Equity Middle Market
Limited partners (LPs) are investors who provide capital to private equity funds. They are passive investors who have limited liability and limited control over the fund’s operations.
In return for their investment, LPs receive a share of the profits generated by the fund. LPs are typically institutional investors such as pension funds, endowments, and insurance companies, but they can also be high net worth individuals.
The role of LPs in middle market private equity is to provide capital to fund investments in middle market companies. LPs are attracted to middle market private equity because of the potential for higher returns than traditional investments such as stocks and bonds.
They also benefit from the diversification that private equity provides, as well as the potential for long-term capital appreciation.
LPs have a number of responsibilities in their relationship with private equity funds. These include:
- Due Diligence: Before investing in a private equity fund, LPs conduct due diligence to assess the fund’s track record, investment strategy, and management team. This helps them to evaluate the potential risks and rewards of the investment.
Capital Contributions: LPs commit to providing a certain amount of capital to the fund. They may make these contributions over a period of several years.
Monitoring: LPs monitor the performance of the fund and the companies in which it invests. They may also provide input on the fund’s investment strategy and management.
- Reporting: Private equity funds provide regular reports to LPs on the fund’s performance, including financial statements and information on individual investments.
- Exit: When the fund sells its investments, LPs receive their share of the proceeds. This is typically done through a distribution waterfall, which outlines the order in which different parties receive payments.
Overall, LPs play an important role in middle market private equity by providing capital and oversight to private equity funds.
Their involvement helps to ensure that private equity funds are managed in the best interests of all stakeholders, including investors, portfolio companies, and the broader economy.
Private Equity Middle Market – Impact of Supply Chains
The global supply chain crunch has created challenges for private equity middle market companies that depend on international trade. The effects of the supply chain bottlenecks have been felt across various industries, and just about every business has been impacted in some form.
The supply chain disruptions have caused delays in the delivery of goods, increased transportation costs, and reduced inventory levels.
This has led to a shortage of raw materials and finished goods, which has resulted in higher prices for consumers. Private equity middle market companies that rely on international trade have been particularly affected by these disruptions.
To mitigate the impact of supply chain disruptions, private equity middle market companies have been forced to adapt their business models.
Many companies have had to shift their focus to local suppliers and manufacturers to reduce their reliance on international suppliers. This has led to a rise in domestic manufacturing and an increase in investment in local supply chains.
Trade policies and tariffs have also had a significant impact on private equity middle market companies. The imposition of tariffs on imported goods has led to increased costs for businesses, which has resulted in higher prices for consumers.
This has created challenges for private equity middle market companies that rely on international trade.
In response to the challenges posed by trade policies and tariffs, private equity middle market companies have been diversifying their supply chains.
Many companies have been exploring new markets and suppliers to reduce their reliance on any one supplier or market. This has led to an increase in investment in emerging markets and local suppliers.
Overall, the impact of supply chains and trade on private equity middle market companies has been significant. The disruptions caused by supply chain bottlenecks and trade policies have forced companies to adapt their business models and diversify their supply chains.
While these challenges have created opportunities for some companies, they have also created significant risks and uncertainties.
Reputation and Trust in Private Equity
Reputation and trust are two critical factors in the Private Equity (PE) industry, particularly in the middle market.
PE firms that have a good reputation and are trusted by their investors are more likely to attract new investors and retain existing ones.
PE firms with a poor reputation, on the other hand, may struggle to raise capital and may find it difficult to exit investments profitably.
PE firms that have been in the market for a long time and have a proven track record of success are more likely to be trusted by investors. Investors are also more likely to trust PE firms that have a clear set of values and a strong sense of ethics.
PE firms that make a conscious effort to invest in companies that align with their values are more likely to be respected by investors.
Family-owned businesses are a significant part of the middle market, and PE firms that have experience working with family-owned businesses are more likely to be trusted by these businesses.
PE firms that have a reputation for respecting the legacy and values of family-owned businesses are more likely to be successful in acquiring these businesses.
PE firms that have a good reputation in the market are more likely to attract high-quality management teams to the companies they invest in.
These management teams are more likely to be motivated to work with PE firms that have a good reputation and are trusted by investors.
Trust is essential in the PE industry, and PE firms that are transparent in their dealings with investors are more likely to be trusted. PE firms that are open and honest about the risks and rewards of investing in their funds are more likely to attract and retain investors.
In summary, reputation and trust are critical factors in the PE industry, particularly in the middle market. PE firms that have a good reputation and are trusted by their investors are more likely to be successful in raising capital, acquiring companies, and exiting investments profitably.
PE firms that have experience working with family-owned businesses, a clear set of values, and are transparent in their dealings with investors are more likely to be respected and trusted by investors.
Frequently Asked Questions
What distinguishes upper middle market private equity from lower middle market private equity?
Private equity firms that focus on the middle market generally invest in companies with an enterprise value between £50 million and £500 million.
Within the middle market, there are two sub-segments: lower middle market and upper middle market. Lower middle market private equity firms typically invest in companies with an enterprise value of less than £150 million, while upper middle market private equity firms typically invest in companies with an enterprise value between £150 million and £500 million.
Upper middle market private equity firms generally have larger funds and can invest more capital per deal than lower middle market private equity firms.
What are some of the top private equity firms in the UK that focus on middle market investments?
There are many private equity firms in the UK that focus on middle market investments. Some of the top firms include ECI Partners, Inflexion Private Equity, Livingbridge, and LDC.
These firms have a track record of investing in middle market companies and helping them achieve their growth objectives.
How does the AUM of middle market private equity firms compare to that of larger private equity firms?
The assets under management (AUM) of middle market private equity firms are generally smaller than those of larger private equity firms.
However, middle market private equity firms can still have significant AUM. For example, ECI Partners has over £2 billion of AUM, while Inflexion Private Equity has over £5 billion of AUM.
What is the role of growth equity in the middle market private equity landscape?
Growth equity is a type of private equity that focuses on providing capital to rapidly growing companies. Growth equity investments typically involve a minority stake in the company and are used to fund expansion initiatives.
Growth equity is an important part of the middle market private equity landscape, as many middle market companies are in the growth phase of their lifecycle.
What are the key factors to consider when evaluating a middle market private equity investment opportunity?
When evaluating a middle market private equity investment opportunity, investors should consider factors such as the quality of the management team, the competitive landscape, the growth potential of the company, and the exit strategy.
It is also important to evaluate the financial performance of the company and the terms of the investment.
What are some of the key challenges facing middle market private equity firms in the current economic climate?
Middle market private equity firms face a number of challenges in the current economic climate. One of the biggest challenges is finding attractive investment opportunities in a highly competitive market. Another challenge is managing risk in an uncertain economic environment.
Additionally, middle market private equity firms may face challenges in exiting their investments due to market volatility or other factors.
Private Equity Middle Market Guide
