Survey says middle market sullen, hoping for bottom

Middle-market players were fairly dour at the year’s halfway point, according to the most recent ACG/Thomson Reuters Midyear 2008 Dealmakers Survey, which revealed that the ongoing credit crunch and the prospect of a full-blown recession weigh heavily on the shoulders of investors.

When asked to characterize the current environment for M&A activity, just under half, or 49%, said it was“fair.” About 39% of respondents said things looked “good” and 8% answered “poor.”

A slim 4% were optimistic, classifying business opportunities as “excellent.”

The results reflect a continued souring in the industry’s mood in the past year. At the midpoint of 2007, 93% of respondents believed the environment was good or excellent, compared to just 43% in the recent survey.

The survey, conducted in June, was based on 542 respondents. More than one-fifth of those surveyed were professionals from private equity and venture capital firms. The remaining respondents were investment bankers, brokers, lenders, corporate professionals, entrepreneurs and service providers, such as lawyers and accountants. The majority of respondents, or about 85%, were based in the United States.

Deal pace for the next six months is expected to be sluggish but not stagnant, the survey found. This suggests that the market may be closing in on a bottom. Nearly 40% of the respondents expect the pace of M&A transactions to remain roughly the same, while 29% see a modest increase and 23% expect a modest slowdown.

The biggest obstacle for M&A activity during the next six months is, unsurprisingly, the weak economy, getting the vote of nearly half of the respondents.

“Fear of recession resulting from the credit crunch, energy costs and inflationary pressures … It’s an uncertainty born of not one, but many factors,” commented one respondent.

Of what deals will come, the consensus is that the energy sector is poised for a strong run during the next six months. About 40% of the respondents said they expect the most growth for this period to come from the energy sector. This was well ahead of 25% who tapped health care and life sciences as the sectors poised to grow most.

“The energy sector is poised for significant organic growth due to the current state of oil and energy prices,” commented one respondent. “The potential is huge, especially for the natural gas sub-sector.” — Michael Baron