Middle-market GPs eye niches, add-ons in pricey buyout scene

  • Generalist firms giving way to sector-focused players
  • Seller’s market seen for dealmakers
  • Credit, exit markets favorable

“It’s a seller’s market,” Stratton Heath III, a partner at Oak Hill Capital Partners, said at the Columbia Business School Private Equity & Venture Capital Conference on Feb. 28. “We’re getting blown out of the water on a regular basis on our bids.”

Despite target prices sometimes north of 11x EBITDA in the middle market, buyers are emerging from both the strategic and private equity arenas, said the GPs, who took part in a panel, ”Middle Market PE: Finding Gems in a Crowded and Competitive Environment.”

While Oak Hill Capital has been able to stage exits such as the $2.7 billion sale of 19 TV stations to Tribune Co last July, it may still plunge in and buy a target in an auction this year, Heath said.

Paying higher prices reduces the margin of error in an acquisition, but these deals may also lead to better returns with value-creation tools such as add-on acquisitions and operating improvements, the GPs said.

Andrew Taub, senior partner at Catterton Partners, said “no rock seems unturned” as middle-market players search for deals.

When bidding for a company, “you need conviction” but debt markets remain flush with investors in search of yield, which helps buyout shops finance deals, he said.

Jeff Barber, managing director, TA Associates, said low interest rates have created a debt bubble.  Larger private equity firms are dipping into the middle market to find deals, but by focusing on market niches and smaller acquisitions, it’s possible to avoid bidding against more deep-pocketed players. In some cases, TA Associates has paid more for non-auction deals with company owners.  The success of an acquisition is more closely correlated to fruitful add-on deals and other factors, rather than price, he said. A generalist strategy is less effective nowadays than zeroing in on fewer sectors to build deal expertise, he said.

Alan Wilkinson, partner at AEA Investors, said LPs are sophisticated enough to see past the current cycle and aren’t pushing for more acquisitions from GPs, for the most part.

“They’re not so concerned” about a lack of buyout opportunities right now, he said. While multiples are about a lofty as they’ve ever been, GDP growth remains tame.

“Multiples are extremely high today and that’s usually not a good thing, but the economy is not overheated,” he said. “So maybe (the deal environment) is not as bad as 1998 or 2007.” 

Looking ahead, Wilkinson said the private equity industry appears to be faring well overall and predicted that it’ll continue to grow.