MiddleGround Capital, which is embarking on its next fundraising cycle, is running a process to extend its hold over its portfolio company Banner Industries that will provide funding for a business combination, sources told affiliate title Buyouts.
The process, which is being run without an intermediary, is part of the active secondaries market that has seen a strong flow of inventory, but fewer closes. Price discrepancies, buyer selectively as well as syndication challenges have made it tough for GPs to close deals like single asset continuation funds. But some see the market stabilizing, which could lead to more closed transactions.
“Deal activity hasn’t been as [robust] as some have been anticipating,” one secondaries adviser said. “As folks look at public markets, and where valuations are shaking out, things seem to have stabilized. You’re seeing people come back, revisit old deals with interest from folks who had previously declined. As we see more of that activity, that gives GPs and advisers more confidence to bring out some deals.”
MiddleGround acquired Banner Industries, a metal processor and distributor, in 2019 (and announced the deal in January 2020) through its first fund. The firm completed three add-ons to Banner: Supra Alloys, which distributes alloy titanium products; Edge International, which distributes medical-grade cobalt chrome, stainless and titanium bar for medical implants and instruments; and NKS, which provides metal products and processing capabilities.
The firm, led by ex-Monomoy Capital executives John Stewart, Lauren Mulholland and Scot Duncan, is running the secondary process to combine Banner with Castle Metals, the source said.
Fund I is out of money for add-ons, so the secondary deal will raise capital to combine the businesses, the source said. “Even with an [approximately] 4.5x return for Fund I, there is a lot of equity value to create for the CV,” the source said.
The deal is aiming to raise up to $350 million, a process the firm is running itself without the assistance of a secondary advisory, a source said. Banner was producing $100 million of revenue and $9 million of EBITDA at the time of the acquisition, which has grown to $350 million of revenue and $70 million of EBITDA, the source said.
The business combination will drive revenue to around $800 million and $125 million of EBITDA, the sources said. The process has attracted lead investors, though it’s not clear who they are. Stewart declined to comment on the identity of the investors.
As is routine in single-asset secondaries deals, Fund I limited partners have the option to sell their stakes in the business, roll into the continuation pool or do a little of both.
MiddleGround is running the deal as it brings its next fundraising cycle into the tough markets. The firm is targeting a total of $2 billion across three funds: MiddleGround Partners III, targeting $1.2 billion; Mobility Opportunity Fund II, targeting $500 million; and its debut ESG-focused fund, Industrial Revolution Strategy, targeting $300 million. The firm is working with Lazard as placement agent on the process, Buyouts previously reported.
Secondaries is expected to gradually open up into the second half of the year. GP-led deals tallied around $52 billion out of total volume of $108 billion last year, according to Jefferies’ full-year 2022 secondaries report. Single-asset deals represented around 50 percent of completed GP-led volume, the report said.