After a record-setting 2017, in terms of both deal value and number of transactions, the US PE middle market is off to a mixed start this year. We spoke with senior partners from four leading PE companies to gain insight to what they see ahead, and to what they’re doing to continue to compete.

 

Included in the interview:
Walter Florence, Partner, Frontenac
Richard Lawson, CEO & Co-Founder, HGGC
Bill Spell, Partner, Spell Capital Partners
Mark Utay, Partner, Clarion Capital Partners

 

Here’s what they had to say:

 

Susan: Where do you see the opportunities for Private Equity today?

 

Marc: Well, it’s a very interesting market to invest in. On one hand, it’s a market where technology and the implementation and use of technology is really at a scale that we’ve seldom seen in our investing history. This creates an ability not to just invest in technology businesses, but to invest in how technology can either empower businesses or fundamentally change the way companies do business. If it’s a consumer business for instance, how consumers want to do business with brands is evolving quickly. So on the one hand, it’s a time of unbelievable opportunity. As the world changes, the consumer changes, businesses change, and people who can take advantage of that change can create businesses of scale in a time frame that would have been almost unimaginable 50 years ago.

 

The flip side, though, is that this is also one of the scariest times in which to invest because existing business models can be changed by those very same factors that create the opportunity. Therefore, when you look at the kinds of businesses that historically private equity firms might invest in, they have far more risk embedded in them because the world is changing faster than ever. The business attributes that used to provide a degree of downside risk protection, like a brand name, might no longer do so. This dynamic creates both an opportunity and a challenge.

 

Rich: At HGGC, we continue to find attractive investment opportunities in technology and information services, business services and industrial services. We believe that the majority of traditional end markets are being fundamentally disrupted by emerging technologies, and we look for companies that are using technology to re-define the industries where they operate, such as automotive, grocery, retail, healthcare and insurance. There are tremendous investment opportunities to be had if you can successfully identify these businesses and find unique angles to differentiate your firm in their sale processes, particularly in the middle market where value-add initiatives can really fuel growth.

 

Bill: It’s a very competitive marketplace. Our strategy has been to specialize and stake out a niche in the PE marketplace. At Spell Capital, our focus is lower-middle market industrial manufacturing buyouts. For us this has been very beneficial and rewarding. A second opportunity is that as technology has advanced and evolved, it has provided for productivity gains. The consequences of this is enhanced cash flows at our various portfolio companies, so that’s good. Thirty years ago, when we started Spell Capital, there was just a handful of financing sources, both senior lenders as well as mezzanine. Today there’s a plethora of financing sources to consummate transactions. That’s a great development. Finally, I would say that the maturing of the market, in terms of deal-flow sources and financial intermediaries really creates opportunities to see a lot of different deals and situations, which allows to effectively specialize and execute a strategy.

 

Walter: My partners and I believe the opportunities in the lower middle market (LMM), which we define as revenues less than $100m, continue to be an attractive area for investment. The data supports it. LMM funds make up approximately 15% of available U.S. private equity dollars but upwards of 95% of U.S. all companies, and PE ownership is still less than 5% of all LMM companies. We’ve built our firm not only to access these opportunities but to manage the challenges and risks that come with investing in this segment of the market. Private equity as a macro assets class continues to be the leader relative to delivering consistent returns over time, and I think there’s a number of different strategies that work.

 

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