Not All Private Equity Dealmaking Is Slowing Down

PE firms that specialize in founder-owned businesses called the recent surge in dealmaking activities “abrupt” and “significant.”


Illustration by II

Even though private equity deals have slowed dramatically over the last year and a half, one corner is chugging along.

PE firms that focus primarily on smaller companies — the lower middle market — are busy investing in founder-owned businesses,

Most founder-owned companies are smaller businesses whose value is under $100 million, according to Tim Clarke, lead private equity analyst at PitchBook. In terms of the number of deals, these companies accounted for 61.5 percent of global mergers and acquisitions in the first quarter, up from 53.8 percent in the fourth quarter of 2020. Companies owned by their founders represented 43.5 percent of the value of all deals, up from 31.3 percent during the same period, according to PitchBook.

“We saw a big pickup in the last couple of months,” said Leigh Randall, managing partner at Topspin Consumer Partners, a private equity firm that specializes in backing founder-led consumer businesses. “We don’t know how long it will continue, but it was pretty abrupt and significant.”

The increase in deals in the lower middle market is due in part to a slowdown since the onset of the pandemic. Everyone is now playing catch up. Founder owned companies are clustered in industries, such as those that are consumer-facing, according to PitchBook. These sectors were severely impacted by the pandemic.

“Some couldn’t sell the businesses because their buyers wanted a sufficient gap between the pandemic and now to see how those businesses have recovered,” said Nitin Gupta, managing partner at Flexstone Partners, a private equity firm focused on the lower and middle market.


Sean Mooney, founder of PE consulting and solutions provider BluWave, said baby boomers reaching their retirement age has also played a part in the increase in lower middle market deal activities. “You’ve got multiple years of business owners who wanted to come to market but can’t, and then you’ve got this huge baby boomer transition underway. It’s stacking up,” he said. “Family-owned businesses are really the only thing of volume in the market, because [founders] don’t want to wait another 10 years for the next cycle.”

According to a recent survey conducted by UBS, 21 percent of business owners — most of whom generate $1 million to $10 million in annual revenue — are contemplating a sale to private equity firms. Additionally, 36 percent of the owners want to sell to company insiders such as partners, management teams, and other employees.

But Mooney said that the actual percentage of business owners who are looking to sell to PE firms might be a lot higher than the reported 21 percent. That’s because employees can’t always afford to buy the businesses themselves and often end up partnering with PE firms, he said.

Leigh Randall has also noticed a surge in sellers in the lower middle market. “There’s a big backlog of founders who want to transact,” he said. “The market was very difficult at the beginning of the year — the perception was that it was difficult to get debt financing for deals. Folks were wary of bringing their companies to potential buyers because they didn’t know if they’d get favorable pricing or even if they’d be able to do a deal. [But now] I think a lot of them believe it’s the right time to strike.”

Tim Clarke said that from a PE firm’s perspective, founder-owned businesses are attractive targets due to their low leverage and the room they have for value creation. In addition, PE firms have been sitting on a record amount of dry powder since 2021 and have been looking for capital deployment opportunities wherever possible.

“If you’ve got critical mass and you’re growing fast, and there’s a reason to think that you’re in a secular growth industry, you’re getting calls every minute, not every day,” Clarke said. “That’s the prime target for PE.”