Private equity investors, roaring ahead to another prolific year of deals, are increasingly eyeing buys hidden away in the lower middle market: companies valued between $10 million and $100 million. It’s not uncommon these days for these investors to pursue strong founder-led or family-owned companies in the $100 million, $50 million, or even $25 million annual revenue size. According to The National Center for the Middle Market, many are “B2B organizations that operate within the supply chains of other larger businesses” — sturdy bolt-ons or platforms that offer innovative product designs, compelling business models, or a valuable stable of workers.
To Make Deals in the Middle Market, Private Equity Needs Cultural Literacy
Doing business starts with building mutual trust and respect.
March 11, 2022
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Summary.
The economic power of the middle market is immense. If it was its own country, the U.S. middle market would be the fifth-largest economy in the world. But when private equity (PE) tries to capitalize on the growth potential of the lower middle market, they face a challenge: cultural literacy. The fact is, the cultural world of PE and that of the lower middle market owner differ. First, there can be differences in education. Second, the business owners being pursued by PE investors are often new to M&A, and their lack of experience can easily cause misunderstandings. Finally, PE must work to overcome its less-than-stellar reputation. As PE looks to scoop out value from the lower end of the middle market, the industry would do well to bring along cultural literacy as well as a capital stack — PE and owners will mutually benefit, as will the U.S. economy.