Surplus capital and low interest rates are providing the currency to boost middle market M&A activity, according to the Inside the Middle Market research report released by Brown Gibbons Lang & Company (BGL). The credit markets are open, and leverage appetite is robust for companies with attractive credit profiles.
The BGL report, now available online, documents a sentiment of cautious optimism among middle market lenders, underscored by the expectation of a stable U.S. economy and continuing strong credit quality in leveraged loan portfolios. Uncertainty around the global economy and interest rates is influencing greater asset selectivity, with the best terms reserved for the highest quality companies.
"The middle market will remain liquid, given the capital flowing into the space, regardless of interest rate hikes. 2016 appears bullish for both lenders and borrowers," said Randy Schwimmer, a senior managing director at Churchill Asset Management, one of 31 lenders that participated in the report.
Private equity participation in M&A declined in 2015, due in large part to corporate buyers, which are actively participating in middle market auctions and keeping purchase price multiples at current elevated levels. "Strategic buyers will continue to be active in 2016. Organic growth has been modest for many companies. Corporate America has historically high levels of cash and credit is available at attractive terms," said Ira Kreft, a senior managing director at Bank of America Merrill Lynch.
"Corporates with cash are driving valuations as much as private equity sponsors, " Schwimmer said. Market participants have witnessed significantly greater premiums when companies are able to attract strategic buyers, above the 1-2x inflation in purchase price multiples observed across the market over the last 12 to 24 months.
Brown Gibbons Lang & Company publishes periodic research reports on a variety of industries including automotive; business services; consumer products and retail; building products and construction materials; environmental and energy services; healthcare and life sciences; human capital management outsourcing; industrials; metals; and plastics and packaging.