PRINT THIS PAGE There seem to be as many definitions of mid-market as there are players. Can someone please give me a sensible answer as to what it is?
06/03/2002. Source:Bridgepoint Capital.
A: From Bridgepoint Capital. As the froth has definitely come off the technology sector, a number of high-profile dot.bombs have hit the headlines and even the larger MBO market has lost some of its shine, there has been renewed interest in the mid-market arena. Yet ask any private equity investor what is meant by the term 'mid-market' and you're unlikely to get two answers the same. For some it is a function of turnover, for others it depends on the number of employees. There is even a suggestion that it is defined by the amount of equity invested in the company (at Bridgepoint Capital, on the other hand, mid-market companies are defined as those capitalised up to E400m).
Given this lack of a common definition among the so-called mid-market private equity players, it is probably better to look beyond purely the financial considerations and instead examine the characteristics of the mid-market companies themselves.
From a private equity perspective, mid-market companies can be characterised in a number of ways. They will typically be family-owned (or subsidiaries of larger entities) and realistically will have limited access to financial resources to fund expansion. Nor will they be of a size or scale to undertake 'financial engineering' (such as securitisation) to fund their business.
Instead, they will operate in a sector or segment that is capable of further organic growth or that lends itself to further consolidation. So they will either be capable of significant domestic growth or of transformation into international groups. To use the latest jargon, they may well be candidates for 'buy and build' strategies. Achieving growth in capital value is the key point. Private equity firms can no longer rely solely on generating portfolio returns from the arbitrage between low entry and high exit multiples. Instead, they must work with management to develop businesses by profit enhancement or by creating platforms from which they can acquire complementary or competing businesses.
The mid-market also has different characteristics when it comes to realisations. One of the attractions of the mid-market is that exits are largely driven by trade acquirers and therefore not reliant upon a vibrant stock market. This is particularly important for investors who naturally prefer cash to illiquid paper when investments are realised.
One final thought: mid-market transactions currently account for 50 per cent of all European private equity deal activity. In these circumstances, it is clear that even in the absence of a unifying definition of the market, there is one thing on which all limited partners and general partners are agreed: the mid-market is a good place to be in the current investment market.
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