Middle-Market Dealmaking Is Back

After a pandemic-induced slowdown, middle-market private equity firms are entering a highly-competitive, risk-on environment, according to PitchBook.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Middle-market private equity firms have bounced back from Covid-19 pandemic-related lows, with dealmaking, exit activity, and fundraising showing signs of continued strength.

In PitchBook’s U.S. PE middle-market report published Wednesday, author and PitchBook analyst Rebecca Springer cited “robust” dealmaking in the first quarter of 2021 as one element of the sector’s success. According to the report, deal count and value in the first quarter of 2021 “easily exceeded” numbers in the first quarter of 2020. In 2021, U.S. PE firms closed 776 deals and spent a total of $119.5 billion, an amount the report deems the “second highest quarterly deal value figure” since the fourth quarter of 2020. PitchBook credits the successful dealmaking to increased vaccinations, the Federal Reserve, and an “ample supply” of cheap debt.

“In Q4 2020, we saw a backlog from the pandemic, so deals that would’ve been done earlier but were delayed,” Springer told Institutional Investor. “In Q1, we saw a continuation of that.”

As for the near future of deal activity in the middle markets, Springer expects the upward momentum to continue for the rest of the year. In the report, Springer lists the $1.9 trillion American Rescue Plan and subsequent increased consumer and business spending as reasons for increased activity.

“Looking forward, we expect similar levels of deal making for another quarter or two,” Springer said. “Everyone I’m talking to in the industry is expecting a very active second half of the year, and there’s more to come in the middle market.”


“Healthy” Exits and Fundraising

As markets began to recover from the pandemic, the middle market also saw “healthy” exit numbers in the first quarter of 2021, PitchBook said. In the quarter, firms made 190 exits and raked in a total of $37.8 billion.

“Exits are not as red-hot as deals at this point, but I expect to see more in coming quarters,” Springer said. In the report, she noted that “even following the rush of exits in Q4 2020, some of this activity still represents spillover from 2020’s slowdown.”

U.S. middle-market PE firms also touted “active” fundraising activity in the first quarter of 2021: These firms closed 40 funds with a total of $37 billion, the report said. Spring attributed the activity to reverberations of the pandemic backlog, but noted that 2021 could provide “growing opportunity” for emerging managers.

“There is broad consensus among industry players that the fundraising landscape is adjusting to the new normal, with fundraising processes once again proceeding quickly for many managers,” she wrote.

As for the next 12 months, Springer said the environment for PE firms is highly competitive and risk-on. “I’m curious to see the ways in which firms look to really differentiate themselves and really unlock value, whether that’s through transformational add-on acquisitions or through scale or through more sophisticated operational engineering,” she said. “I’m really curious to see what firms are going to move all the assets that they’re likely to be gobbling up in the next couple of quarters.”