Middle-Market Companies to Thrive for Foreseeable Future, Says Expert Amid Small Business Boom

In the public eye, middle-market private equity companies don’t command nearly as much attention as their large-market competitors or public corporations. But lately, they’ve created quite the stir in the investor community.

Private middle-market fundraising has quietly surged in 2021. According to Pitchbook, middle-market public equity firms raised a total of $237.7 billion in the first three quarters of this year, closing 295 funds in the process. There’s every reason to believe the tide will keep rolling in Q4.

The boom is stunning but not altogether a surprise. Pitchbook implied that middle-market interest was on the upswing at the start of the year after a severe drop-off in public equity fundraising during 2020 due to the COVID pandemic. 

Still, the rebound is significant — largely thanks to certain sectors that did comparatively well during the global health crisis.

What’s Driving the Middle-Market Surge?

A number of factors are behind the middle-market boom. This is according to Dena Jalbert, CEO of Align Business Advisory Services, one of the leading M&A advisory firms for mid-market companies.

“The gap between public and private market multiples has become wider, interest rates remain low, and the asset class returns are significant due to the record-setting deal activity and exit multiples,” Jalbert says.

As a result, middle-market companies’ fundraising cycle has shortened. General partners now raise capital on a timeline of two to three years, rather than the more customary five. The compressed cycle means companies have to return to the funding market sooner than normal, which stimulates cash flow more quickly.

“Middle-market revenue growth continues to soar, causing a rising of multiples,” Jalbert explains. “Investors like this performance and are increasing their allocations accordingly.”

Sectors that Lead the Push

The private firms driving the middle-market renaissance have one thing in common: not just surviving the general downturn during the pandemic, but thriving.

Technology led the way. Dependence on digital communication and remote workplaces soared during the pandemic. As a result, the growth experienced by public and large tech companies trickled down to those in the middle-market private equity market. This was especially the case for eCommerce businesses.

Jalbert says middle-market industrials are part of the boom as well. “Our firm has seen a tremendous amount of demand in industrials, in particular, due to its recession-resistant nature — as shown throughout COVID, the ‘essential businesses’ like waste management, home services and building products.”

Outlook for Middle-Market Private Equity Firms

Although economic uncertainty is as prevalent as ever, veteran advisors like Jalbert believe the near future holds significant promise for middle-market companies.

For one thing, it’s difficult to discount the sheer cash flow happening in the segment. Liquidity is near all-time highs as investors continue to rush into new fund opportunities for private equity companies. Middle-market companies are therefore finding a lot more in their cash reserves, which powers their ability to reinvest more vigorously.

Interest rates, as well, remain at record-setting lows. Some analysts expect that interest rates will eventually go up — possibly as soon as next year — so there’s a chance that investors are funneling their resources into private funds now before that happens.

The rush to private equity funds stands in defiance of a few economic looming economic trends. The specter of potential inflation hangs over economic forecasts in 2022, as well as the well-publicized issues facing the global supply chain.

Still, Jalbert believes middle-market companies have a resilience that can’t be dismissed, even in the face of all those detrimental factors. “All of this liquidity will fuel growth and demand, so the middle market will continue to thrive and grow for the foreseeable future.”

An Entrepreneurial Rebound

The flood of middle-market investments confirms a surprising opinion among financial experts: Despite the once-in-a-lifetime setbacks that the pandemic brought, the entrepreneurial ecosystem is again flourishing.

Part of the reason is that more individuals are jumping into the entrepreneurial market. New business applications in the United States topped 4.5 million in 2020, most of them in the latter half of the year. In July 2020, monthly business applications topped 500,000 for the first time in years. The monthly application rate has remained close to that level ever since, nearly hitting 500K again in April and May of 2021.

Although these new businesses are small by definition, their proliferation as private equity companies reflects a more general interest in all private enterprises — including those in the middle market.

The combination of new investment opportunities, sped-up funding cycles, and nearly unrestricted liquidity has the middle-market private equity market on fire again. At least in the short term, Jalbert believes this prosperity says something pertinent about the nation’s entrepreneurial ecosystem health.

“It tells us it is as strong as ever. The huge abundance of cash currently in the middle market will fuel hyper revenue growth for middle-market companies for the foreseeable future.”

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. The content was purely for informational purposes only and not intended to be investing advice.