Conference Presentation, Panel
Mid-Market Private Equity
Milken InstituteLauren Leichtman, Brian Reynolds, Ted Virtue, Barry Volpert, Kneeland Youngblood, Adam Sokoloff, Nealon Youngblood
- Market conditions are characterized by significant liquidity inefficiencies in debt, public, and private equity sectors, prompting a strategic focus on acquiring "great value" in the lower mid-market and a predicted 120% increase in lower middle-market deal flow concentrated in the last two months.
- Near-term activity is expected to be driven by refinancing and recapitalization opportunities at "compelling" low rates, with capital from corporate strategic buyers (loaded with cash) and secondary buyouts fueling a robust new issue and M&A market, though the current "ebullient" state suggests fewer attractive investment opportunities overall.
- Exit strategies anticipate a surge in activity with twice as many exits as a normalized period over the next few years due to the convergence of harvest cycles for funds invested before and after the financial crisis, longer hold periods (rising from four to five or six years), and LP demands for liquidity during fundraising.
- Return expectations project mid-market buyout returns exceeding mega-fund returns, with specific targets of high teens net returns and net doubles, while larger funds target net 12%, driven by management enhancements that can double EBITDA and a shift toward higher-priced, "very liquid" markets.
- Capital market dynamics foresee a continued flow of "dry powder" seeking opportunities, with CLO and BDC markets providing significant financing (including $54 billion in issuance and Q1 2013 $26 billion), though rates are expected to rise within a couple of years, potentially reducing leverage and multiples while increasing inflation risks for commodities.
- Investor behavior is shifting toward concentration, with Limited Partners (LPs) increasing commitment sizes to fewer managers, focusing on 10-year vintage returns, utilizing fee-free co-investments for higher performance, and squeezing firms unable to execute exits or raise smaller funds.
- Competitive advantages are identified in the ability to transform companies from $200–$400 million in sales to billion-dollar entities, access markets below $300 million enterprise value where CLO/BDC access is limited, and capitalize on corporate demand for global expansion into Asia, Latin America, and Africa.
- Future outlooks predict a persistent three-year run for the private equity environment, a shakeout of underperforming managers, a reduction in the number of new funds starting, and a continued premium on return-driven institutional investing as companies navigate economic growth correlations and potential tax reform stagnation.