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Why Private Equity Is Going Big on the Middle Market


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For business owners, private equity demand fuels plenty of opportunities—and questions about next steps.

Even as the graying ranks of U.S. middle market business owners see surging interest from private equity investment firms, determining their next steps after a sale can be a challenge much trickier than making the deal itself.

In the first half of 2021, private equity firms completed nearly $265 billion in transactions involving U.S. middle market companies, putting the industry on track to beat the previous record of $416 billion set in 2019, according to PitchBook. This rush of activity shows no signs of slowing, driven by a wave of Baby Boomer business owners nearing retirement age and the vast amount of liquidity coming into this market.

PE middle-market deal activity graph


Source: PitchBook, "US PE Middle Market Report, Q2 2021.

"When you think about what’s going on in the middle market, what you’ve got is a supercycle of business transition," says Bob Marcus, head of capital markets for Fifth Third Bank.

Yet taking the giant leap from a lifetime of running their own company to becoming a seller or partner can be difficult. Many owners of midsize businesses—those with annual revenues between $20 million and $500 million—aren’t sure how to prepare for a deal, or what comes next.

"They know how to run their company, but they have no idea what to do after they sell," Marcus says. "Many of those people are coming to that realization now, and the number is going to continue to grow over the next five to 10 years."

He says business owners should explore the difficult questions as early as three years ahead of a transaction: What will the deal mean to them and their family, both financially and emotionally? What does life after exit look like?

Business owners must also assess the potential impact of a transaction on the companies they leave behind. If they are considering a partial sale that would infuse new capital, owners should explore how a private equity firm could play a variety of ongoing, supporting roles in the company.

There are a lot of options for investors to partner with businesses, not just buy them," Marcus says.

Jumping Into the Middle

For private equity investors, the middle market has plenty of appeal, according to Marcus. One reason is that it is often more fragmented, offering opportunities to grow organically and through acquisitions.

Middle market firms also are better positioned than their larger peers to pivot quickly and leverage innovation to fuel growth and capture market share. "They’re more nimble and can take advantage of opportunities," he says.

As private equity directs more attention to midtier companies, those investors are rolling up their sleeves to help fuel that growth. That’s a change from years past when many private buyers focused on "financial engineering"—often the use of increased leverage or drastic cost cutting—to quickly boost investment returns.

Marcus says more acquirers are looking to nurture and advise portfolio companies to fuel stronger, long-term growth. "They learned that financial engineering is not a competitive advantage," he says. "They also found that focusing on operations, sourcing opportunities in-house and managing companies for a successful exit was a better model for creating long-term value."

Private investors are diving deeper into industry and sector segments, hiring operating partners and building in-house expertise that can help their portfolio companies grow. "Private equity firms know how to take something that’s a good idea and scale it quickly. There are a lot of opportunities to do that in the middle market," Marcus says.

Understanding the Private Equity Landscape

For middle market companies, it’s crucial to understand how private equity may impact the particular industry, Marcus says. They can explore whether the flow of capital to competitors would tip the competitive balance, or whether investments in adjacent industries might disrupt their own growth prospects.

"If you’re a CEO or a business owner of a middle market company, you can’t ignore what private equity is doing in your space," Marcus says. Fifth Third works with clients to demystify the private equity process and educate them about options for working with investors, he adds. The yearly Fifth Third Financial Sponsors Summit is one way the bank connects investors and companies.

"We’re committed to helping businesses adapt to a changing economy, drive innovation and growth and access the working capital they need to meet their goals," says Kevin Lavender, head of commercial banking at Fifth Third Bank.

Getting clarity around their strategic and personal objectives can also help business owners choose the right investment partners. By learning more about the value that private equity can bring to their firms, owners can be more prepared to make the right decision.

"You only get one chance to sell your company," Marcus says. "There are no mulligans, so you better make sure that you do it right." Learn more at 53.com/Commercial.

"Private equity firms know how to take something that’s a good idea and scale it quickly. There are a lot of opportunities to do that in the middle market." – Bob Marcus, Head of Capital Markets, Fifth Third Bank

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