What’s on The Horizon: Middle Market Mid-Year Review and What to expect as 2016 rounds to a close.

Posted on: October 3rd, 2016

As with global markets worldwide, the Middle Market scene in 2016 had to contend with the consequences propelled by uncertainness within the oil industry and the overall shock contributed by the United Kingdom’s decision to leave the European Union.

Key Insights of the Middle Market in 2016

According to data supplied by the National Center for the Middle Market, after two quarters in which revenue grew at about 6.1%, the growth rate climbed higher to 7.2% this quarter.

It was also reported that year-over-year employment growth was up this quarter to 4.4% compared to the 3.6% reported for the previous two quarters.

Confidence seems to have dipped slightly especially after experiencing an uptick at the beginning of 2016. However, confidence in the national, state, and local economies has remained relatively stable.

The middle market’s appetite for investment has not fluctuated much over the past four and a half years and investment plans continue to be restrained.

M & A Activity in the Middle Markets

Based on recent data compiled by Mergermarket, M&A activity in 2016 is experiencing a more ‘normal’ overall level of activity, as when compared to 2014 and 2015, when there was an extraordinary level of influx of private equity capital.

There has been a shift in the industries attracting mergers and acquisitions. While acquisitions of industrial and chemical companies have doubled, the volume of consumer-based companies has contracted. Energy and Mining saw a 25% decline, whilst Technology remained breakeven.

What to expect in Q416 and in 2017

As we enter the last quarter of the year, the future of the Middle Market will more or less depend on the outcomes of various political and economic uncertainties faced in the U.S. and globally. However, for industries that continue to demonstrate sustained growth and attractiveness, there could be an increase in acquisition and investment activity.

So, if you are an owner of a middle market firm, or are looking to invest in the middle market, it is best keep an open mind and strike while the iron is hot.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.