Economic growth, strong public equity valuations, and a healthy debt market should boost deal making, according to Inside the Middle Market released by Brown Gibbons Lang & Company (BGL) www.bglco.com. 2017 could be a pivotal year if pro-business policy changes under the Trump administration are enacted, representing potential tailwinds for the middle market.
The BGL report, now available online, documents a decidedly optimistic sentiment in the lending community, on the heels of a robust year in middle market loan fund raising. Recessionary pressure has waned, with the expectation that tax policy changes, deregulation, and greater emphasis on fiscal stimulus will fuel growth, creating an improved environment for middle market borrowers and business owners and injecting confidence to recharge the M&A market.
"We expect the lending market to remain liquid for the foreseeable future," said Randy Schwimmer, senior managing director and head of originations and capital markets at Churchill Asset Management, highlighting the substantial capacity raised by private lenders and their asset managers facilitating one-stop credit solutions for borrowers. Alternative lenders are continuing to jockey for market share in the wake of regulatory oversight and market volatility which have hampered leveraged lending by traditional banks and business development companies (BDCs). "The middle market should also remain liquid despite any overall volatility in the broader markets," Schwimmer said, one of 24 lenders who participated in the report.
Surplus capital and pent up demand from buyers and sellers will provide a foundation for a more active M&A market in 2017. "Private equity sponsors are sitting on a lot of capital that they need to put to work. Sellers have waited a year longer. Sponsors have had money to invest for a year longer. The combination of these factors, along with favorable credit markets and anticipated growth in the U.S. economy, will lead to a meaningful increase in M&A," observed Steve Robinson, a managing director Antares Capital.
"I think there is a clear opportunity for M&A," believes Bob Marcotte, president of Gladstone Capital. "The continued motivation to create synergies and improve margins will drive a resurgence in M&A, and without the overarching regulatory burdens that were prevalent in the last administration, it will embolden people to do more. It is a more opportunistic environment for M&A than you might have seen in the past."
Conditions continue to be very favorable for owners of middle market assets that want to generate liquidity, as competition has pushed enterprise value multiples to historical high levels. EBITDA multiples for the middle market—whose enterprise values are between $25 million and $500 million—have remained within a tight band, averaging 8x to 9x throughout 2016, according to Standard & Poors Leveraged Commentary & Data.
"We are seeing as high of multiples as I can recall at any time during this cycle," shared Scott Reeds, a managing director at Citizens Financial Group. "We've been at a "peak" for several years now. To a large extent, that's being driven by low rates and plenty of buyer cash. Until we get a major correction, and until rates normalize, higher valuations should be sustained," added Schwimmer.