Shifting Trends in Lower Middle Market M&A: A Guide for Smart Business Dealmakers
Private credit has seen some significant shifts in the past year and a half, with senior lenders pulling back and unitranche moving towards the true middle market. This shift created ideal conditions for Resolute Capital Partners, leading to one of their busiest years for deployment, according to Director of Investments Tyler Augusty.
Augusty shared at the Nashville Smart Business Dealmakers Conference that the firm’s deal structures in 2023 were a bit different from their usual approach. Instead of primarily supporting sponsors in acquiring new platforms, they found themselves providing additional debt and equity to supplement or replace senior credit facilities. Despite the unconventional year, Resolute Capital Partners saw strong deployment numbers.
Looking ahead, Augusty noted that the M&A market is returning to a more realistic state in terms of seller expectations. The market frenzy seen in 2021 and early 2022 is unlikely to repeat itself. This shift has led to a need for price discovery and a greater willingness among groups to settle for good outcomes rather than holding out for exceptional ones.
A positive development Augusty highlighted is the increase in third-party reports produced by sellers in the lower middle market. These reports, covering aspects like earnings, market studies, and diligence, can streamline the transaction process and provide valuable insights for buyers.
Despite the added cost, Augusty emphasized the benefits of sell-side Quality of Earnings (QofE) reports in simplifying transactions. Aligning structure and expectations, especially regarding the future plans of core management teams post-transaction, is crucial for success in the lower middle market.
Dealing often with founders and businesses new to institutional capital, Resolute Capital Partners stresses the importance of setting clear expectations early on. While sell-side advisors may initially seem like an added expense, Augusty believes they can ultimately reduce transaction risks in the long run.
