How close is the US middle market to an inflection point?
There are still a few unique ways to look at this dynamic market segment. Earlier this year, pitchbook partnered with law firm Akerman to spotlight the sub-$1 billion US buyout fund market. They created a fresh methodology to look at buyout activity coming from sub-$1 billion funds, as opposed to solely analyzing activity by deal size. What are sub-$1 billion buyout funds buying in the market, and what are they paying?
By comparing their methodology to Akerman's sub-$1 billion buyout fund angle, we've noticed visible discrepancies. The clearest divergence is in purchase price multiples, where sub-$200 million deals are more than two turns cheaper than the broader middle market (9.7x versus 7.6x). It's conventional wisdom that smaller deals tend to be cheaper deals, as well. But the consistency of those numbers suggests that pure middle-market investors, concentrating at the lower end of the market, have maintained better discipline in a frothy environment.
The going-forward question is how much that will matter if macro trends turn around. We're in the midst of a historically long bull expansion in the US—the second longest since World War II—and interest rates are heading north after decades of decreases. Geopolitical tensions and increasing wage pressures are also coming into play. The easy credit conditions that helped inflate purchase price multiples won't be this easy for long. How much of an impact will larger market trends have on even the most disciplined investors?
Time will tell, but economic expansions don't last forever. The coming quarters may provide evidence of an inflection point in middle-market activity that affects PEGs of all shapes and sizes.