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Research

Pillars of performance - why we prefer mid-market to large cap

Insights

  • Mid-market companies, the engine of economic growth, present an attractive segment for private equity investments. The broad market of target companies greatly enhances deal flow for mid-market private equity managers.
  • Deals in the mid-market segment produce the most attractive and steady returns as value creation depends on the ability of the manager to change a company’s value by improving operations, irrespective of the external environment.
  • In the current environment of high prices, acquisition valuations have evolved in favor of smaller deals. Moreover, post investment, a differentiated operational approach of smaller companies compared to larger ones can enhance the multiple of smaller companies.

Mid-market companies present an attractive segment for private equity investments. In the US, there are nearly 200,000 middle market enterprises that contribute to one-third of the private sector GDP. During 2016, mid-market companies experienced vibrant growth, with revenues growing at a rate of 9% year-on-year, well above its five-year average. In Europe, mid-market enterprises drove European growth by contributing EUR 1 trillion to the economy, despite challenging macro-economic and political environments during the last few years.

The broad market of target companies greatly enhances potential deal flow for private equity managers focused on the mid-market. Private equity managers concluded 856 buyout deals during 2016 – 82% consisted of investments in companies with enterprise values below USD 500 million. Mid-market deal flow proved to be resilient despite the heightened market volatility associated with Brexit and the presidential election in the US, with the number of transactions increasing across both sides of the Atlantic. A lower dependence of deal closings on credit markets due to less or no leverage involved in such transactions contributed to the consistency of investment activity in the mid-market segment compared to the large-cap segment.

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