• Scott Chapman

Navigating Middle-Market Buyouts in 2020

M&A activity in the middle-market is robust heading into the new year, as buyers look to gain market share or build out complementary capabilities.


This momentum should continue throughout 2020, thanks in part to easy credit and robust fundraising that has led to a buildup of dry powder among private equity buyers.


In this article, we will review the key aspects of navigating today’s active middle-market M&A environment.


Action in the Middle Market


Financial and strategic buyers, buoyed by strong cash positions and active credit sources, are competing aggressively and paying premium valuations for a limited supply of well-performing companies.


Meanwhile, banks and credit funds are actively deploying capital and increasing their valuation ceilings.


Treasury yields have declined sharply since the beginning of 2019, putting the cost of debt near two-year lows. Business owners looking to take advantage of historically low interest rates are choosing to grow through acquisitions. Furthermore, companies will continue to reap the benefits of enhanced cash access due to tax reform, and many executives, wary of a looming economic downturn, are turning toward strategic M&A in order to compete more effectively and potentially increase their profit margins.


The amount of capital invested in private equity funds is at an all-time high. Private equity funds have a limited time to invest the funds, typically 5-7 years or they must send the capital back to the investors. Despite private equity firms working hard to deploy capital, there is a stockpile of dry powder or uncalled capital. As a result, private equity firms are under pressure to invest large amounts of money in the coming years. In addition, corporate cash levels are at or near all-time highs, with many companies using these funds to grow through strategic acquisitions.


All these factors are leading to higher EBITDA multiples and driving deal sizes above their historic norms.


The middle market has been a bright spot, with 2,687 deals valued at $374.3 billion through the first nine months of the year, surpassing the same period of 2018.


At Copper Run, we are seeing many clients completing add-ons to grow market share. In fact, 68% of deals in the U.S. are considered “buy and build,” according to Pitchbook.


Conclusion


Because buyouts are getting expensive and mid-sized deals typically provide the best returns, being programmatic with M&A is the most effective strategy. When M&A is treated like an ongoing commitment rather than a one-off project, outcomes are maximized. We believe acquirers should maintain a consistent approach with an emphasis on deal volume rather than sheer dollar value.


Copper Run offers comprehensive buy-side advisory services, helping clients identify and execute a corporate growth strategy through acquisitions. Our professionals have successfully advised on and executed comprehensive acquisition searches for companies that create value for the acquiring shareholders.


We are actively guiding buyers through this M&A environment and would be happy to assist your company in the same way.


Scott Chapman is a partner and co-founder of Copper Run, overseeing client services, business development and company operations. He is focused on serving companies in the consumer and industrial, technology and business services sectors.

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