PE shops: filling in the middle

Contact: Brenon Daly

After buying both small small and big companies, private equity (PE) firms have recently been filling in the middle, too. Since the start of May, buyout shops have been averaging a rapid-fire pace of one midmarket transaction every week, according to disclosed and estimated prices in 451 Research’s M&A KnowledgeBase. Further, the five recent deals, which collectively total $3bn in spending, span a wide range of PE transactions: take-privates, secondaries and cleaning out VC investors.

The activity in the midmarket, which we loosely define as deals valued at $200m-800m, comes amid a thawing in the credit market. As debt has become cheaper and more readily available, buyout shops have accelerated their big-ticket purchases. (All five of this year’s largest PE transactions have been announced in just the past two months. In many cases, these financial buyers have outbid strategic acquirers, a reversal of typical M&A roles.)

Now, the PE deal flow appears to be moving to involve targets valued in the hundreds of millions of dollars, not just 10-digit acquisitions. In recent weeks, we’ve seen Vista Equity Partners, Clearlake Capital Group and Accel-KKR all announce midmarket transactions. (Accel-KKR is particularly noteworthy because its $509m leveraged buyout of SciQuest marks the firm’s first take-private since the recession.)

One reason the financial buyers have lowered their sights is that they have been paying smaller multiples for smaller companies. With the exception of Vista’s purchase of Ping Identity, all of the midmarket deals have gone off at lower valuations than the significant billion-dollar transactions. For instance, buyout shops paid an uncharacteristically rich 8x trailing sales to acquire both Cvent and Marketo in recent weeks.

The surge in PE shopping at the top end of the market coupled with the more recent midmarket uptick has already put buyout spending in 2016 ahead of the January-June levels in any post-recession year except 2013. (That year’s total was skewed by the massive $25bn LBO of Dell.) Already in 2016, PE firms have announced 125 deals totaling $19.7bn in spending. That eclipses the half-year activity in 2015 and 2014, even though overall tech M&A spending this year is only about half the level of the two previous years.

Select recent midmarket PE transactions

Date Acquirer Target Deal value
June 1, 2016 Vista Equity Partners Ping Identity See 451 Research estimate
May 31, 2016 Accel-KKR SciQuest $509m
May 12, 2016 Clearlake Capital Group Vision Solutions See 451 Research estimate
May 31, 2016 Platinum Equity Electro Rent $323m

451 Research’s M&A KnowledgeBase