Private Equity and the Middle Market

By Generational Equity

09/14/2022

Recently, the Wall Street Journal published an article discussing the tremendous interest private equity firms (PE) have in car washes right now. Yes, you read that right, PE firms are investing in car washes.

It is a great article if you own a car wash, but what caught my attention was the chart below:

As you can see, the investment of PE firms in middle market companies has literally exploded since the year 2000. And if you include businesses valued below $25 million, the number is even higher.

Why do PE firms, with an invalid reputation of only working on huge buyouts, find the middle market so attractive? As we have discussed before there are several key reasons:

• Acquiring several smaller firms in an industry is far less dangerous than risking loads of capital on a single large investment.
• Add-ons, as a strategy, have become quite popular with PE firms that specialize in the middle market.
• By bringing professional financial, management, and operational expertise to their investments, PE firms can dramatically grow their businesses far beyond what the founding entrepreneur usually can.
• Investments by PE firms in middle market companies often prove to be very lucrative for business owners since they usually retain a portion of ownership and often can participate in a “second bite of the apple” later when the much larger combined entity is sold or taken public.

These are just a few of the reasons that both PE firms and sellers find these transactions can be quite favorable.

For this reason, we often introduce the idea of a PE firm as a buyer to many of our clients who have rarely considered this type of buyer at all. What surprises many is that there are active PE firms operating in their industries that they are not even aware of.

Quite often, if you don’t have contacts in the PE community as we have, you will likely not even be able to reach out to these buyers without professional representation like Generational. (Note: we have over 35K registered buyers in our proprietary database, many of them PE firms)

To learn more about how active PE firms are and how you can position your company to attract their interest, I would invite you to attend a Generational Growth and Exit Strategy conference near you. While there you will not only learn a great deal about how to grow and exit your business successfully, you will also be able to meet individually with our M&A Professionals at the meeting to confidentially discuss your situation.

You can learn more about our conferences, and find one near you, by using this link.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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