Rainier Partners, Pfingsten Partners and Southfield Capital show lower middle market alive and well

Good morning, dealmakers. MK Flynn here with today’s Wire.

As I sip my morning coffee, I’m pleased to see a bunch of lower middle market deals percolating nicely.

This is a year when smaller deals count for a lot. More on that thought, below.

Proving the point, you’ll find news from Rainier Partners, Pfingsten Partners and Southfield Capital, below.

But not all is calm across the deal landscape these days. A recent report identifies M&A dispute hotspots. We’ll take a look at the findings.

But first, let’s dip into the lower middle market.

Outperformance potential
I came across an interesting conversation about the lower middle market on EisnerAmper’s Trends Watch. It featured Michael Trihy, director/portfolio manager, Bow River Capital, talking with Elana Margulies Snyderman, director, Eisner Advisory Group.

Here’s the quote from Trihy that caught my attention:
“We believe that the lower middle market segment of PE has the best outperformance potential – these are smaller, less sophisticated companies with a higher number of value creation levers that you can pull when compared to large cap businesses. There is also a lot more flexibility on exit options for small and mid-sized companies; a PE firm can sell to a broad set of strategic buyers as well as the ever-growing ecosystem of larger financial buyers. Large cap private equity has a much more limited set of exit options for a company, typically only a small number of large strategic buyers or an IPO. Performance in lower middle market private equity funds typically demonstrates a high level of dispersion so it’s crucial to be able to pick best-in-class managers with sector-specific expertise and the experience necessary to navigate a challenging macroeconomic backdrop.”

To that end, check out these lower mid-market deals reported this morning by our Iris Dorbian:

Under the rug
Rainier Partners, a Seattle-based PE firm backing lower middle-market services businesses, has made a majority investment in SCI Flooring, a floor covering services provider with customers in the Midwest.

SCI currently operates three locations under the company’s umbrella: SCI Floor Covering in Detroit; MC Flooring in Kansas City; and Eastpointe Interiors in Grand Rapids.

Strategic M&A is expected to play a role in SCI’s growth, as it expands geographically and operationally in the fragmented flooring industry with Rainier’s guidance.

Earlier this year, Rainier announced the closing of its inaugural fund at a $300 million hard cap, beating its $250 million target, as Buyouts reported.

Lights, camera, action
Environmental Lights, a portfolio company of Pfingsten Partners, has acquired Carlstadt, New Jersey-based City Theatrical, a maker of LED lighting products, control technology and accessories for theater, stage, TV, film and live event applications.

Based in Chicago, Pfingsten invests in the distribution, electrical equipment, logistics and infrastructure sectors.

Name recognition
Franchise FastLane, which is backed by Southfield Capital, has acquired Denver-based Raintree Franchise Growth, a firm specializing in brand development for franchisors.

Some of the franchises showcased on the company’s website include Best Choice Roofing, Soccer Stars, and Wallaby Windows.

Southfield Capital, based in Greenwich, Connecticut, invests in lower middle market companies in the outsourced business services sector.

Dispute hotspots
Growing regulation and financial market volatility are fueling M&A disputes in an uncertain deal market, finds Berkeley Research Group’s Mid-Year M&A Disputes Report 2023.

Drawing on insights from M&A practitioners and BRG experts, the report explores the impact of key trends such as the “crypto winter” and mandatory ESG disclosures in Europe, the Middle East and Africa (EMEA), North America and the Asia–Pacific (APAC) region.

“Dispute hotspots” identified by global dealmakers in the report included the digital assets and services sector and ESG factors.

Key takeaways from the report include:
• Deals in digital assets and services are ripe for disputes as market volatility and proposed regulations disrupt cryptocurrency activity. Artificial intelligence (AI) is also an area to watch as generative AI technologies come to market and regulators look to impose guardrails.
• ESG commitments are coming to the fore, driven by competing pressures from regulatory scrutiny and pushback against ESG-motivated decision-making. This has heightened the need for due diligence around ESG in M&A transactions.
• The APAC region has emerged as a significant focus for M&A disputes, as deal volumes remain high and regulatory expectations around digital assets and ESG shift.

This report involved a survey of 162 leading M&A-focused lawyers, private equity professionals and corporate finance advisors around the world.

That’s a wrap for today. Buyouts’ Chris Witkowsky will be with you tomorrow for Wednesday Wire, and I’ll be back on Thursday.

Happy dealmaking,

MK