The mega-firms make the headlines. The small and mid-market firms do the deals—or most of them, anyway.
Often lost in our era of big-is-better is the fact that we’re still an industry dominated by small buyout shops. The firms with oak-paneled offices dotting the globe, museum-quality art collections, hundreds of employees, billions of dollars under management are the exception; the rule is closer to a handful of principals operating in a no-frills office where the coffee machine may or may not be on the blink.
A close inspection of the fund-raising and deal-making numbers in the United States through the first three quarters of 2006 tells the story. Of 211 funds in the market raising money, 72% of them have targets of $750 million or less, or what we would consider “small” funds today. Just 14% are lower-middle-market funds with targets of $750 million to $1.5 billion; 9% are upper-middle-market funds with targets of $1.5 billion to $3 billion; and only a rarefied 6%, or 13 funds, are of the mega variety with targets of $3 billion or more.
Similar story on the deal-making side of the U.S. market. Of 245 LBO deals with disclosed valuations identified by Buyouts as having closed through the first three quarters, 69% of them weighed in with enterprise values of $500 million or less. Just 13% qualified in our book as lower-middle-market deals with enterprise value of $500 million to $1 billion; another 13% were upper-middle-market deals with enterprise values of $1 billion to $3 billion; and just 5% were mega-deals of $3 billion or more.
To be sure, the lion’s share of the money this year has flowed into the mega-funds, and into the mega-deals. And at least one cut of the data reinforces anecdotal evidence that limited partners are showering so much affection on the big funds that the littler ones are feeling neglected. Add up all the targets of the mega-funds in the market during the first three quarters and you get $111.5 billion; by the end of the third quarter firms had raised 75% of that sum. Likewise, a healthy 77% of the cumulative target has been raised by the upper-middle-market funds with targets of $1.5 billion to $3 billion.
By contrast, the smaller funds weren’t faring as well. Firms raising lower-middle-market funds with targets of $750 million to $1.5 billion had reached just 60% of their collective target as of the end of the third quarter. It was 63% for the small funds with targets of $750 million or less.
Buyout pros know that if you really want to learn what’s going on in an industry you have to look far beyond the headlines in the trade press. Our own market is no exception.