The Value of the Right Capital Partner for Middle Market Acquisitions

“Grow or die” the old axiom goes. For middle-market businesses, survival in today’s economic environment requires keeping up with the growth of your sector and broader GDP. Otherwise, fundamentally, a competitor – or some element of the economy – is eating your market share. Yet growth can be hard and, at times, growth can be slow.

In today’s hyper-competitive, post-COVID marketplace, executives and shareholders are increasingly looking for alternate avenues of growth outside their businesses’ four walls. Plus, a relatively low interest rate environment, combined with a record-high money supply, has led to a greater availability of capital for middle market businesses to pursue growth through add-on acquisitions.

“Add-on” or “tuck-in” acquisitions have become a common element of creating shareholder value. When executed with the right strategy, and with the right capital partner, acquisitions can be a highly effective value creation mechanism. They supplement economies of scale, expand customer bases and geographies and complement core product offerings. Moreover, acquisition growth can also be used to solve for innovation and R&D in a capital-efficient manner.

A partner that shares core company values, and brings a perspective and commitment for the right duration, is as essential as the “nuts and bolts” to executing a successful acquisition strategy.

Our team at Pritzker Private Capital consistently hears from closely-held businesses exploring add-on acquisitions for the first time. The conversations orient on a critical, but oft-overlooked, element for middle-market businesses seeking to execute growth-oriented acquisitions: identifying a differentiated capital provider to pursue acquisitions alongside. A partner that shares core company values, and brings a perspective and commitment for the right duration, is as essential as the “nuts and bolts” to executing a successful acquisition strategy.

Partnership for the Right Duration

When choosing a capital partner, founders and selling shareholders are often concerned with constraints, and can be uneasy with what guardrails they inherit when transitioning a majority share. In the traditional private equity approach, one of the foundational constraints is time. Firms are beholden to LPs that require consistent recycling of capital. A contrasting approach can be found in capital partners that understand and appreciate how middle market businesses grow over the long-term and are less restrictive than a traditional time-bound fund structure. We call this strategy investing for the “right duration.”

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The flexibility of “right duration” capital assists in prioritizing transactions that that are right for the business at any juncture, insulating the long-term success of the business from external pressures. For example, many middle-market businesses approaching year four or five of an investment cycle with a more traditional investment partner will slow capital deployment for transformative acquisitions given the narrow runway the business has for integration prior to an exit. This approach is limiting and prioritizes short-term disruption over long-term value creation. Free of this constraint, and with access to an unbounded investment horizon, the business is free to grow as all stakeholders see fit, providing for what we believe to be a more valuable business.

This philosophy also provides for a more seamless integration process as two businesses merge. The success of any business combination is only as strong as the time and the resources allocated to integration, making, as we say, “1+1=3.” This often includes in-depth diagnostics on how the combination of two sets of human capital, customers and vendors meld to form a stronger business. A deliberate and thoughtful integration process is essential to creating value through an acquisition strategy.

The success of any business combination is only as strong as the time and the resources allocated to integration, making, as we say, “1+1=3.” This often includes in-depth diagnostics on how the combination of two sets of human capital, customers and vendors meld to form a stronger business.

Trust, Stability and Alignment on Core Values

In our discussions with transitioning founders or selling shareholders, we spend as much time discussing stability and alignment of values as we do enterprise values and transaction structures. Gone are the days of blind auctions and the highest purchase price winning the day – sellers want buyers they can trust, who will carry on legacies and will act as good stewards of businesses for years to come.

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That trust also extends well beyond shareholders. Within a transaction, the employees, customers and vendors of the acquired business all have loud voices in the performance of the go-forward company. These constituents advocate for stability, and, in certain instances, they may have formal consents necessary for an acquisition to proceed. We’ve seen large customers and vendors go so far as to play matchmaker by introducing members of their supply chain to capital partners where transitioning shareholders have sought a transition. Longer-duration capital partners advocate for thoughtful growth, and can also insulate customers from the constraints of traditional private equity investment cycles.

For middle-market businesses pursuing growth-focused acquisitions, a capital partner providing a flexible, nimble and customizable capital structure with a commitment to invest for the right duration is as attractive an option as it gets. With the right capital partner and strong acquisition strategy, middle-market companies can protect long-term value and fully take advantage of opportunities for growth and expansion.