More room to manoeuvre
The middle market (companies with enterprise values of between $100 million and $2 billion) can offer greater opportunity for value creation, as it consists mainly of businesses that are innovative and growing. Often, they are more agile than larger private or public companies. While they are usually relatively well-established, stable and profitable compared to smaller companies, mid-market firms are often relatively early in their corporate lifecycle, so may still be operationally less sophisticated. They may also be led by smaller, less experienced management teams that lack the expertise to make changes that could take their companies to the next level.
For mid-market GPs, such characteristics can be attractive. Using their own skills and deep industry knowledge, they may be able to put in place strategic initiatives and make efficiencies in businesses that have greater scope for operational improvements. For example, an experienced GP can provide management guidance and mentorship to help firms hone their business offerings. Particularly for mid-market companies with already established products or services, PE investment can finance quicker growth and expansion than companies might achieve by waiting for it to happen organically. For businesses operating in competitive markets, this can be especially helpful, as agility and speed can provide an advantage.
The value of dedicated teams
With more managers spotting opportunities in the middle market, the number of teams devoted to operational value creation has risen in recent years.
Usually, these comprise professionals with deep strategic and operational expertise. They are solely focused on operational value creation, during both the due diligence and investment hold periods. The companies that emerge from this high-touch operating approach are often professionalised and well-structured business-category leaders with higher multiple expansion. In combination with value creation that has already taken place, this can make them attractive targets for larger buyout managers.
Operational drivers of value
As mentioned, GPs can use several levers to professionalise businesses. For example, they can drive organic growth by:
enhancing a firm’s sales and marketing
optimising product pricing
refocusing a company’s research and development
enhancing its management
and controlling costs.
Of course, GPs can employ all these strategies in larger companies, but mid-market businesses are typically more agile and less complex. As such, they can make these types of strategic shifts more rapidly.
M&A is another common way for GPs to drive growth and improve margins in portfolio companies and, again, they can undertake this type of activity more quickly and easily in mid-market companies. Transformational M&A is much easier to execute in this area, while the fragmented nature of the middle market provides a broader universe of smaller target companies for add-on M&A.
In summary
In conclusion, private equity investors are shifting their focus towards operational improvements to boost returns and performance, with the middle market offering a fertile hunting ground for value creation. With more managers spotting opportunities in this market, the number of teams devoted to operational value creation has risen in recent years. GPs can use several levers to professionalize businesses, with mid-market companies typically more agile and less complex, enabling these strategic shifts to occur more rapidly. As part of a well-balanced private market portfolio, exposure to mid-market private equity can bring many benefits. To learn more about this topic, read the full report from Titanbay Ltd and its affiliates.
As part of a well-balanced private market portfolio, exposure to mid-market private equity can bring many benefits, some of which derive from GPs’ potential to create value more quickly and easily than in other spheres.
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