Despite recent headlines about the turbulence across public debt markets, there is still an abundance of capital in the lower middle market to support LBOs, refinancings and dividend recapitalizations.
The fundamental difference between the high yield market and the private debt funds that operate in the lower middle market is that private debt funds enjoy the benefit of committed long term capital (public BDC’s being the exception), whereas the high yield market is subject to the changing appetite of investors. With stable capital, private debt funds are insulated from the inflows and outflows of capital that drive gyrations in the high yield market. Stable capital, coupled with an undersupply of attractive investment opportunities, allow private debt funds to provide debt to lower middle market companies that is actually more attractive than that available to much larger transactions which require high yield or broadly syndicated loan market support.
While the middle market may be insulated from junk bond turbulence for now, we anticipate that eventually lower middle market debt funds will also pull back. This retreat, however, will not be caused by a lack of capital, rather, it will result from declining enterprise values. For example, in larger LBO’s, when debt no longer supports lofty valuations, enterprise values fall. This decline in large market valuations will drive down the values of comparable trades. Thus the enterprise values of the larger deals will eventually cause the middle market to come off the boom multiples we have experienced the past 12-18 months. However, even with reduced enterprise values, the abundance of capital in the lower middle market will still support reasonable leveraged transactions.
Check out our most recent transactions here.