The blistering pace set in the 4th quarter of 2012 has passed, but deal flow, while slow in early 2013, looks to be picking up. The middle market1 continues to be a bellwether for the greater M&A market. Secondary buyouts2 represent an increasing share of private equity exits.
Q4 2012 was an anomaly of sorts, as expected increases in tax rates for 2013 drove significant deal activity. According to PitchBook, Q4 2012 represented the second-best quarter of the last four years for the number of deals closed and was the best quarter ever for private equity exits.
The middle market was no stranger to this activity, as it represented approximately two-thirds of all deals closed. Relative to the first three quarters, in which the middle market represented between 50% and 60% of all deals closed, the middle market experienced the largest pick-up in deal activity in Q4 2012. The uptick in middle market deal flow can be seen in the following chart:
This pace could not be maintained for long, and a dip in deal activity was noted in Q1 2013. This decrease was indiscriminate of industry, geography, or size. Notably, however, the middle market was least affected as it came to represent 68% of deal flow in Q1 2013, an increase over the prior quarter. We believe there are a number of factors explaining the middle market’s relative outperformance, the most important of which being an increase in secondary buyouts.
Secondary buyouts are becoming the exit of choice as the median holding period for private equity investments is at a record level, coupled with the fact that the private equity capital overhang is near an all-time high. We are already witnessing the transition to secondary buyouts in the middle market, which reached an all-time record in 2012 both in number (246) and as a percentage of total middle market exits (nearly 46%).
PitchBook’s data suggests secondary buyouts may surpass corporate acquisitions as the most common exit strategy in 2013, and we agree. Our private equity clients have expressed a similar sentiment, and we have even seen this trend in action as most of our due diligence activity thus far in 2013 has involved private equity sellers.
Looking into the rest of 2013, we expect a steady level of deal activity in the middle market. We note that closing remains a challenge but interest seems to be as high as ever. Given our personal experience year-to-date, we foresee another record breaking year in terms of secondary buyouts in the middle market and a steady, if not increasing, amount of deal flow throughout the remainder of the year.
If you would like to learn more about the state of the M&A market and our expectations, RubinBrown's Private Equity Services Group advisors would be pleased to speak with you.
On a related note, RubinBrown is proud to be the Capital Connection® sponsor at this year’s 2013 ACG Mid-America Corporate Growth Conference, which will be in St. Louis on May 14th and 15th. For more information, visit www.macgc.org or contact Ben Barnes of RubinBrown (contact information below).
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1The middle market, for purposes of the statistics cited herein, comprises transactions ranging from $25 million to $1 billion.
2Secondary buyouts are transactions in which a private equity firm or financial sponsor sells all or part of its investment in a company to another private equity firm or financial sponsor, effectively providing an exit to the current owner.
PitchBook: The 2Q 2013 Private Equity Breakdown
PitchBook: The 1H 2013 Middle Market Report
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