U.S. PE M&A lagged in Q1 but lower middle market produces brightspot: Pitchbook

Surprise! While private equity M&A and exits lagged in first quarter, the lower middle market actually posted gains, according to data from Pitchbook Data.

The number of lower middle transactions increased 21 percent to 189, while deal values surged 71 percent to $12 billion, Pitchbook said. The Seattle provider of private financial market data defines the lower middle market as completed deals valued from $25 million to $100 million.

Strategics were on a tear in 2015, gobbling up many companies. This caused many private equity firms in the first quarter to shift their strategy down market to LMM, said Nizar Tarhuni, a Pitchbook senior analyst.

In the lower middle market, PE firms can buy smaller companies at a cheaper multiple, Tarhuni said. Private equity buyers know these smaller companies will “require more work. But they can then set them up for an exit into the core middle market,” he said.

In general, 388 U.S. private equity transactions  closed in Q1. This was down 17 percent from 467 transactions completed in Q1 2015. Deal value was $71 billion against $89 billion a year earlier, a drop of 20 percent, Pitchbook said.

The upper middle market — transactions valued at $500 million to $1 billion — posted the worst results in Q1. The quarter saw 20 closed upper-middle transactions valued at $12 billion. That compares with 45 transactions in Q1 2015 worth $28 billion. That’s a 55 percent drop in the number of deals and a fall of 57 percent in valuations.

“The upper middle market, while smaller, is still big enough to deal with the same problems and consequences that the mega guys do,” Tarhuni said. This includes currency fluctuations and debt market issues, he said.

The core middle market wasn’t as dismal but still rough. Pitchbook defines core middle as completed transactions valued at $100 million to $500 million. First-quarter deal volume fell nearly 33 percent to 179 transactions while valuations tumbled about 13 percent to $47 billion.

With deal flow lagging, exits followed suit, Pitchbook said. There were 170 PE exits in Q1, valued at $13 billion. This compares with 240 exits in first- quarter 2015 that were valued at $21 billion.

The latest first quarter saw no private equity-backed IPOs, Pitchbook said.

And the median time private equity needed to exit an investment in the first quarter moved higher, to 7.4 years from 5.3 years in 2015, Pitchbook said.

Tarhuni noted a seasonal component to exits. “Typically, we won’t see as many [exits in the] first quarter as during the back half of the year,” he said.

Action Item: Read Pitchbook’s U.S. PE Middle Market Report 1Q 2016 here.

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