Middle-market M&A had a great fourth quarter in 2012.  Dealmakers were busy closing deals ahead of the then-anticipated increase in taxes.  While the first quarter of 2013 has been relatively less active as compared to the end of 2012, there are signs that deal activity, especially in middle market, will pick up in the second half of 2013. 

What is middle-market?

Middle-market commonly refers to M&A deals, such as private equity (PE) buyouts, between $25 million and $1 billion; this wide range in turn gets broken down to 3 sublevels:  lower ($25 million to $100 million), core ($100 million to $500 million) and upper ($500 million to $1 billion), with the lower most active in 2012. 

This area represents a lion’s share of M&A activity in the United States.  According to PitchBook, the middle-market expanded by the end of 2012 to 71.4% of total buy-out activity volume—its highest share in the last decade.  The U.S. private equity industry’s fortunes are made predominantly in the middle-market area.

What is in store for the rest of 2013?

The fundamentals have improved nicely from 2009 and 2010 and are in the area on average from a 5X to 8X EBITDA multiple (depending on the industry and the quality of assets; it is a seller’s market for high quality assets).  Valuations are improving.  Sellers have become more realistic when it comes to the price for their business.  Financing is flowing again to the assets generating reasonably good cash flow.   Company debt levels are historically low (about 50% average, as compared to between 60 to 70% in 2003-2006).  The private equity funds fundraising activity has continued to increase.  Thus, it is reasonable to expect a spike in middle market PE activity, especially in such popular sectors as B2B, consumer products, technology, financial services and healthcare.  The buyers will hunt for quality assets to deploy capital. Also, exit activity (dispositions of middle-market companies by way of strategic acquisitions, secondary private equity buyouts or going public) is bound to increase as the market stabilizes and private equity funds who have held certain investments longer than expected because of the downturn seek to liquidate those investments, other private equity funds seek to invest their capital and strategic and additional buyers seek to expand their market share and geographic reach. 

Florida: the nation’s most innovative state

While historically Silicon Valley and Boston areas were the “happening” places for PE activity, things are quickly changing.  According to PitchBook, the South was the most active region in 2012.  Florida in particular, which was ranked as the nation’s most innovative state by  Fast Company magazine, is well- positioned to be an important part of this growing market, particularly in the fields of technology, financial services and healthcare.

Indeed, at the Association for Corporate Growth’s  recent InterGrowth conference in Florida, the Florida campus of The Scripps Research Institute, a state-of-the-art biomedical research facility that is widely expected to be a great incubator of innovation, generated a lot of interest. With over 2,000 attendees from across the United States and 150 private equity firms in attendance at the conference, we experienced firsthand a great deal-making energy in the air and strong interest among middle-market buyers and lenders in Florida, as a premier business growth destination.