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Private equity’s aggregate numbers paint a picture of wheels grinding almost to a halt over the past 18 months, but a more detailed examination reveals a robust mid-market that has been outpacing the larger-cap space.
Private equity’s largest funds tend to attract all the industry’s headlines, so it can be easy to overlook that the asset class stretches far beyond deals involving household names and into the vast plains of the mid-market.
And while 2023 was a difficult period for private equity overall — with deal values and volumes markedly down compared to recent years — the mid-market held up relatively well despite recent economic headwinds.
That was certainly the case in new transactions last year, for example. European mid-market deals accounted for 25% of the overall 776 deals completed on the continent last year (versus 23% in 2022) and 32% of the €135 billion value in 2023 (against just 18% in 2022), according to the Centre for Private Equity and MBO Research.¹
It was a similar story of resilience in the US, where the value of mid-market deals fell by just 19% in 2023, against a 33% drop in the market overall. Further, the number of deals in the segment even increased slightly year on year, Pitchbook figures show.²
Mid-market fund managers are also more optimistic about deal prospects for this year than their larger counterparts. In an S&P survey, nearly three quarters of respondents managing between $500 million and $10 billion in AUM said they expected deal activity to improve in 2024, versus just half with AUM of over $10 billion.³
Yet it’s worth noting that there is no universal definition of mid-market in the private equity industry. At Moonfare, for example, we consider mid-market companies to have an enterprise value of between $50 million and $500 million.
Some firms identify mid-market target companies as low as $5 million, while others stretch to as high as $1 billion. Mid-market funds also vary considerably in size, depending on the firm’s definition. For Pitchbook, its mid-market data is based on activity by buyout funds that have raised between $100 million and $5 billion.
Each month, you’ll receive the most important private market insights and Moonfare updates – straight to your inbox.
Each month, you’ll receive the most important private market insights and Moonfare updates – straight to your inbox.
Each month, you’ll receive the most important private market insights and Moonfare updates – straight to your inbox.
Whatever the precise definition, mid-market funds and their portfolios have performed well over the past year or so, even against a more difficult economic backdrop.
For example, LPs received a much-needed positive inflow of capital last year from these funds, according to Pitchbook.⁴ Mid-market fund managers distributed $88.7 billion and received contributions of $66.3 billion, a net positive of $22.4 billion. By contrast, US mega-funds distributed $31.6 billion in the same period but received almost double this in contributions, resulting in a negative outflow for LPs of $30 billion.⁵
These distributions are contributing to mid-market funds outperforming their large-cap peers over recent quarters. In Q3 2023, mid-market funds achieved a 12.7% rolling one-year IRR, versus 7.6% for mega-funds.⁶
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There has been good news from mid-market funds at the portfolio level, too. In the US, private equity-backed mid-market companies are performing well, according to the Golub Capital Altman Index.⁷
Despite the high interest rate environment, mid-market companies in the index grew earnings by 11% and revenues by 5% in the first two months of 2024, comfortably outperforming companies in the S&P 500 and S&P small-cap 600.⁸
There are several fundamentals underpinning the mid-market’s resilience over recent times (and, indeed, over the long term), making it potentially an attractive area for investment.
Relatively low debt levels. Mid-market deals tend to be financed with a lower debt to equity ratio than larger transactions.⁹ This clearly has advantages for existing portfolios companies at a time of higher interest rates.
However, it is also a benefit when it comes to getting new deals over the line: mid-market private equity funds targeting companies with less than $50 million of EBITDA can often bridge new deals with equity (with an option to refinance at a later date) because the individual cheque sizes are smaller and therefore do not leave sponsors with too much exposure to individual assets.
Deep pool of opportunities. The mid-market is large — in the US alone, there are around 300,000 businesses in this segment generating $13 trillion of revenue, according to JP Morgan Chase data.¹⁰ It’s therefore a deep and broad pool for private equity fund managers to select deals from and it stretches across a range of industries, sectors, niches and stages of development, including, in some instances, start-ups.
That said, mid-market fund managers predominantly target established, mature businesses that benefit from private equity’s value creation tool kit and capital to unlock growth potential.
One example is Oakley’s 2021 acquisition of a minority stake in a Spanish property portal Idealista, valued at €175 million.¹¹ Oakley’s deep expertise and a strong track record can help digital marketplaces to accelerate their growth. In 2024, the investment firm sold its stake to Cinven, in a transaction that valued Idealista at €2.9 billion, realising a gross return of 2.1-times money multiple.¹²
Illustrating the mid-market’s diversity of opportunity, another example is Bridgepoint’s 2024 buyout of French cloud-based social intranet provider LumApps. The firm intends to support the company’s international expansion, M&A and product development.¹³
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Alpha generation. As the examples above demonstrate, mid-market companies are usually ripe for operational improvements and expansion. They often need private equity to do a fair amount of heavy lifting, such as professionalising their structures and processes to create a solid foundation for growth.
They also frequently operate in fragmented areas and so lend themselves to buy and build strategies that consolidate industries, increase market share, and bring businesses to new geographic and/or product markets.
These improvements and growth potentials — with middle market funds typically being the first source of institutional capital for their targets — offer a clear path to increased valuations at exit, which can often withstand periods of multiple contractions, like those we see today.
Over the past ten years, revenue and EBITDA in private equity-backed mid-market companies have increased by an average of 115% and 124%, respectively, according to analysis by Morgan Stanley.¹⁴
Specialist sector expertise. Many mid-market private equity houses focus on particular areas of the economy. Over the past decade or so, many have built up teams with sector investment and/or operational experience, which helps them identify high potential companies with strong growth prospects and provide targeted support for expansion.
Oakley Capital, for example, invests in technology, consumer, education and business services. Verdane, meanwhile, focuses on technology-enabled growth businesses in Europe with two core themes — digitalisation and decarbonisation.
Specialist mid-market firms based out of the US include L Catterton, which targets consumer businesses worldwide and Amulet Capital Partners, which focuses on healthcare. CORE Industrial Partners, meanwhile, which invests in manufacturing, industrial technology and industrial service businesses.
Robust and varied exit routes. Realising investments and returning capital to investors is obviously the ultimate aim of any private firm. And here, the mid-market benefits from some structural advantages.
Trade sales are a clear path, as are sales to a wide range of other financial sponsors — more so than mega-deals that may be too large for most private equity firms.
Earlier this year, for example, Apax Partners exited its investment in Indian medical devices company Healthium MedTech to KKR.¹⁵ In autumn last year, Harwood Private Equity sold pet food manufacturer Assisi Pet Care to US-based Wind Point Partners.¹⁶
And, while mid-market players are not heavily reliant on public listings to exit their portfolio companies, this can still be a strong option as Triton’s 2023 IPO of specialist manufacturing company, RENK Group, demonstrates.¹⁷
Finally, the new kid on the exit route block, the GP-led single asset continuation fund, has become particularly popular among mid-market players as a way of returning capital to investors. The secondaries funds financing these deals have shown a preference for this segment of the private equity space.
The “vast majority” of single-asset continuation funds in 2023 featured mid-market assets, according to Jefferies.¹⁸ This is partly because secondaries players need adequate diversification in their portfolios and are therefore more able to finance transactions below the mega-deal level.
It’s also because they believe there are more potential exit routes further down the line for these businesses. Jefferies adds that the mid-market is likely to continue to be the most active segment for these deals in future.¹⁹
The private equity mid-market has shown resilience during what has been a challenging time for private equity and the economy more generally. Yet it also has a range of attributes that make it an enduringly attractive area for investment at any point in the cycle.
With its lower entry valuation points, lower leverage, greater headroom for value creation and deeper pool of opportunities, the lower profile mid-market has the potential to generate better returns than its better known large-cap cousin.
Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Don’t invest unless you’re prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong. Subject to eligibility. Please see https://www.moonfare.com/disclaimers.
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