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U.S. Middle-Market Deals Defy Economic Uncertainties

High-quality mid-market firms are witnessing a surge in deal flow

U.S. Middle-Market Deals Defy Economic Uncertainties

After a historic run of U.S. middle-market deal activity in 2021, the market cooled considerably last year as dealmakers paused amid uncertainties brought about by rising inflation, aggressive rate hikes and valuation volatility. However, in the past two quarters, as a reflection of the growing quality of middle-market companies in the U.S., deal activity held up impressively.

The aggregate value of mid-market buyouts and venture deals in the U.S. experienced a surge of 237% in Q4 2022 compared to the previous quarter, reaching $74.1 billion and marking the second-best quarterly performance in the past decade. This momentum carried over into the first quarter of this year, with an aggregate deal value of $64.2 billion across 80 deals, the lowest deal volume in a decade.

This section of the report is sponsored by Preqin and originally appeared in the Summer 2023 edition of Middle Market Executive.

Still-high aggregate deal value across the smallest deal volume meant the average deal size hit a historic high of $1.4 billion, surpassing the previous quarter’s record of $1 billion.

Much of this is likely due to private equity and venture firms’ record levels of dry powder, which surpassed $2.5 trillion for the first time as of April 2023, according to Preqin Pro. This meant PE and VC firms had an unprecedented amount of cash to deploy. Of the 10 billion-dollar mid-market deals in the U.S. this year, eight were all-cash transactions. In the case of Qualtrics, for example—which tech-focused PE firm Silver Lake and Canada’s largest pension fund took private—less than 10% of the financing came from debt.

Related content: How to Build Flexibility into Your Dealmaking Approach

Furthermore, leveraged buyouts in large caps are also becoming more expensive due to increased borrowing costs as rates rise and a valuation mismatch between buyers and sellers. Both factors have pushed private equity and venture firms toward the mid-market in search of deals that are easier to finance and execute. Although the number of deals has decreased, indicating dealmakers’ cautious stance, the significant aggregate transaction value suggests they remain prepared to pay for worthy deals.

With improving business prospects alongside lower valuations, mid-market companies have become more attractive to investors. These smaller companies are typically seen as having promising growth potential in scale and operations.

According to the Golub Capital Altman Index, which monitors around 110-150 U.S. mid-market businesses backed by private equity, these companies had a year-on-year increase in earnings and revenue growth of 11% in the first two months of this year, surpassing expectations. The results suggest the tailwind of falling energy prices more than offset the headwind of rising interest rates, helping to boost consumer confidence and profit margins.

Related content: Dealmakers Optimistic About 2023’s Second Half

Mid-market deals have proven more resilient than larger transactions in today’s uncertain environment, in part due to their lower reliance on debt financing for leverage and wider and more fluid exit windows, given the current weak IPO market.

The exit environment in the U.S. mid-market sector has been robust over the past few years, hitting an all-time high exit multiple of 9.18x in 2021, the most active year for deals. Although the exit multiple has fallen to 7x in 2022, it is still above the 10-year average of 6.25x, indicating healthy returns for investors.


Caroline Rolle is a financial writer with Preqin’s Content team, specializing in private capital markets in the Asia-Pacific region.


Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.