In the era of headline grabbing megafunds, an insatiable appetite for the middle market has spurred unprecedented competition in the private equity industry. Generally categorized as buyout transactions under $500 million, the middle market offers significantly more options in contrast to the much larger end of the spectrum. The options, in turn, offer more opportunity.
Some of the largest firms like the Carlyle Group have dedicated middle market groups that are not involved in the firm’s numerous and highly-publicized billion dollar buyouts.
“Explaining to people that we’re dedicated solely to this area is an eyeopener,” says Rodney Cohen, head of the Carlyle Group’s middle market group. “This is our bread and butter. This is all we do. I’m not involved in the mega-buyouts.”
Instead, Cohen, like others in competition for a piece of the middle market makes investment decisions on a broad spectrum of industries: candles, axles, and pharmaceuticals to name a few. The common denominator? Opportunity.
“It’s all about opportunity identification,” Cohen states. “Unfortunately, there’s a lot of frog kissing. So it’s all about volume of meetings, volume of opportunities.”
While there are relatively many opportunities in the middle market, fierce competition has shaped innovative approaches to marketing added value for limited partners. For example, the Inkwell Group distinguishes itself to potential investors with a platform that spotlights racial and gender diversity to enhance business performance and build value.
Other private equity firms are responding to increasing demands from investors to place weight on increased transparency of environmental, social, and governance (ESG) factors. In a study conducted by PricewaterhouseCoopers, 41% of 111 private equity general partners were willing to pay a premium for target companies with good ESG practices and corresponding metrics.
In addition to having the prerequisite flawless resumes, the trending importance of strategic branding and positioning of a firm is at the heart of middle market competition.
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