In February, we predicted that 2018 would be a big year for middle market M&A, especially for those on the sell side. With the second quarter coming to an end, it’s looking like our prediction will play out.
Valuations remain high due to persistent economic optimism. Meanwhile, the middle market transaction count continues to rise despite high valuations, indicating that investors continue to make acquisitions.
The takeaway? This year is a fantastic year for a business owner looking to sell.
First Quarter Dip
Looking at the data, there is a noticeable dip in transaction count and volume in the first quarter from the fourth quarter of last year. However, this isn’t an indication of a down year, as M&A activity usually peaks at the end of the year and starts slow the next year.
We fully expect activity to pick up for the remainder of 2018, and so do middle market funds who are fundraising at historic levels to complete deals.
Baby Boomers, IT, and Healthcare
The primary reasons that activity will be high throughout the rest of the year are baby boomer retirement and IT sector and healthcare sector growth.
Private equity buyers have a continuously replenished market of prospects as baby boomers retire at a rate of 10,000 per day. The seemingly endless supply of available acquisitions is keeping middle market funds in constant competition to boost their portfolio during this time of growth and while they have the funding to support it. Family businesses are some of the biggest beneficiaries as their aging owners start to look for an exit strategy and buyers ready and willing to make a deal.
Meanwhile, the U.S. economy is seeing sustained growth in the IT and medical industries, and that growth is reflected in their respective M&A markets. According to Pitchbook’s recent first quarter middle market M&A report, 2017 was the first year that there were more IT sector deals than B2C sector deals. We’ve also already noted the demand for medical practices among PE firms who are gobbling up small practices in order to combine them into more efficient, patient-focused businesses.
It Won’t Last Forever
However, valuations can’t maintain this trajectory, and we are seeing economic volatility creep its way back into equity markets. As we’ve recently discussed, the probability of a recession in the next one-to-two years is increasing.
Business owners should keep in mind the fact that the good times don’t last forever, and that holds true for middle market M&A as well.
So, our advice is to take advantage of the market’s optimism while the opportunity is so obviously presenting itself. If you’re a business owner considering divesting or selling, now is the time to confidentially discuss your options with us. Contact us today.