Dealmakers slightly more optimistic on middle market

Despite a steep drop in mid-market deals, more merger and acquisition professionals are predicting an uptick in deal activity over the next six months.

Thirty-two percent of mid-market observers forecasted an increase in the number of mergers and acquisitions with transaction values under $500 million (€318 million), according to a study conducted by the Association for Corporate Growth and Thomson Reuters.

That figure is up from the 25 percent of respondents who answered optimistically in December in the immediate wake of credit market woes. Global mid-market transactions for the first half of 2008 are down 18 percent from the same period last year.

“Even though the market has cooled, you still have roughly 90 percent of respondents indicating that the M&A market is good to fair,” Den White, ACG vice chairman and partner at McDermott Will & Emery, Boston-based law firm which specialises in middle-market transactions, told PEO.

“We’re clearly not in a hot phase but we’re clearly not dormant either.”

The survey polled 500 investment bankers, private equity professionals, corporate development executives, lawyers, accountants and business consultants on the current mid-market deal-making climate in the US and abroad.

Among private equity professionals surveyed, 43 percent said they expected deal pace to stay the same, while 30 percent said they expected more deals and 37 percent expected less.

In one of the more telling indications of the impact of the credit crisis and the broadening US economic downturn, the survey revealed that roughly 68 percent of respondents say that the middle-market is now a buyer’s market. In June of last year, at the peak of the buyout boom, 75 percent said it was a seller’s market.

“Sellers expectations a year ago were very high. Things have changed dramatically in a relatively short period of time,” said White, who added that a major problem roiling middle market deals now are recalibrating seller expectations.

The survey also revealed mid-market private equity firms’ growing reliance on operational partners in steering portfolio companies through a weakening US economy.

Seventy-eight percent of respondents said there has been an increase in the number of private equity firms hiring partners with operational expertise, and 15 percent said they had hired one within the last five years. Seventy-six percent said that operational partners could be valuable dealmakers even without private equity experience.

“It’s interesting to see that the private equity players themselves view [operational expertise] as an important component of their business,” said White. “Having folks like [operational partners] on board are not only helping in improving portfolio performance but also in deal-sourcing.”