Middle-Market PE Managers Had a Bad 2022 — But They Still Believe They Can Get Deals Done

“Dealmakers are looking to gain an upper hand in today’s debt-constricted market through any means possible,” says Katten’s Christopher Atkinson.

Illustration by II

Illustration by II

After a rough 2022 — and despite facing more challenges ahead — middle-market private equity managers remain optimistic about transactions and are focused on creative solutions to make sure deals close.

More than 70 percent of private equity professionals specializing in the middle market expect mergers and acquisitions to either increase or remain steady this year, according to the latest report from law firm Katten. Eighty-four percent of middle-market professionals are more confident than they were last year that deals will progress and close as planned, according to the report.

Katten based the result on a survey of 100 U.S.-based private equity professionals who have been involved in deals ranging from $10 million to $10 billion. The survey was conducted in the fourth quarter of 2022.

Dealmakers in the middle market didn’t enjoy a smooth ride in 2022. Companies in the middle market have been trapped in an environment of low profitability due to rising supply chain costs and labor costs. Compared to the large buyout firms, those in the middle and lower markets have also faced a more hostile fundraising environment, with allocators weighted down by overallocation to PE firms. But Katten says that investment opportunities still exist for quick adapters.

Kimberly Smith, global chair of Katten’s corporate department, agrees. “The past 12 months have been anything but straightforward for middle-market private equity funds,” she said. “Looking ahead, the most active middle-market dealmakers will be those willing to embrace alternative approaches to getting deals done, whether that’s considering new deal terms, methods of deploying capital, or the sectors in which they invest.”

Financial services and technology could become the most popular sectors in 2023, with 54 percent and 47 percent of professionals saying that the sectors present the greatest opportunity this year, according to the report. Currently, the top sectors are financial services and real estate, with 58 percent and 48 percent of firms saying that they’ve invested in these industries.


Despite the overall optimistic outlook, challenges remain for middle-market dealmakers. According to the Katten survey, the top three concerns are the lack of available capital, high inflation, and interest rate hikes. Some respondents are also worried about mounting regulatory pressures, which are reflected in a set of rules proposed by the Securities and Exchange Commission to increase transparency in the private fund industry.

As borrowing costs continue to rise, all-equity deals, which require buyers to cover the entire transaction without debt, have gained in popularity. According to Katten, 41 percent of PE professionals believe that all-equity transactions will be the key to winning deals in 2023.

“Dealmakers are looking to gain an upper hand in today’s debt-constricted market through any means possible,” said Christopher Atkinson, partner and co-chair of Katten’s M&A and PE practice. “In years past, buyers tried to differentiate their bids with [representation] and warranty insurance to reduce post-closing exposure for sellers. Now that nearly everyone is doing that, the focus seems to be more on providing [the] certainty of a quick and uneventful closing — especially as the waters get choppier.”