Private Equity M&A, is it smoke and mirrors or is it real for Middle Market Companies

Speaker A: Hello everyone. I'm Stephen White, Managing partner of Onix Partners Group opg, an international business valuation firm providing valuations for corporate valuations, ESOPs and estate gift tax valuations. You are listening to our monthly podcast Business Valuation Real Talk. Foreign. Now that we've reached mid year, I think this is a good time for us to discuss how the M and A activity has been going so far here in the United States. The M and A deal activity has increased in June, going up 5.8% with 1202 announcements compared to 1136 announcements during the month of May. Now, keeping this in perspective because we have to look at, or I should say we should keep an eye on aggregate spending on these M and A deals. And with that being said, the aggregate spending did drop in June, which was 9% less than what was spent on the M and A activity the prior month. But let's go a little deeper, or rather let's pull back the onion on the M and A activity so far this year. According to FactSet, one of the resources that we reach out to here at OPG to look into the M and A activity, it stated that over the past three months, the sectors that have seen the most increases in M and A deal activity during the prior three months a year ago have been commercial services, industrial services, health technology and non energy minerals. So the United States, here in the United States, I should say what's been driving a lot of this activity has been in the private equity space. And the private equity activity has increased in June, up 30% from what it was in May. There were 149 deals in June compared to 114 in May. That's actually a huge jump. Now if we look at the transactions from 2026 versus 2025 and we're going to break them down into revenue bands, this is what it looked like. Between 10 to 25 million we had 589 versus 549 a year ago. And 25 to 50 was 522 versus 454 and 50 million in revenue. Up to 100 million in revenue there were 532 versus 449. So what does that all mean? What are those numbers telling us about what happened last year versus now? What it does mean is that there's growth in the M and A market that we have been waiting on for almost 13 months. Now that growth has finally arrived. Which brings us to this month's episode Private Equity M and A Is it smoke and mirrors or is it real for middle market companies? Now here at uh, Business Valuation Real Talk, we make a point to make certain that our listeners are well versed and they also understand the topics that we're actually discussing today. And since we're going into private equity, I do know that sometimes business owners, founders confuse private equity and VC or think they're interchangeable. So allow me just a moment to go over the differences between a VC and private equity. When would you use a VC or who should be looking at vc? In other words, I think there is a significant differences between uh, venture capital which was an acronym is vc and private equity, which is pe. Venture capital firms and private equity firms consider investing in different sizes and types of businesses as well as the objectives, maybe even the percentages of a company and the investment types will differ as well when you are looking at venture capital. So let's just say that if you are a startup company, you probably think that you have the potential to progress faster and achieve long term growth and have long term benefits. If that is you, then you probably would consider taking help from a venture capital company because the funding can come from investment banks, wealth investors or even venture capital funds. But in addition to funding you can also get a managerial or technical, uh, expertise. Startups will receive all the support that you may want or necessarily need to dominate the competition and generate more profits in the early years. One recommendation that I would share with you, if that is the route, if that kind of identifies your business currently and so you are going to start looking for raising capital from a venture capitalist, I would highly recommend that you do something that's called a pre money valuation or early stage valuation. That way you can have a clear understanding of exactly how much money do you really need and how do you want to invest it into your company without diluting all of your shares. So that's pertaining to venture capital. So exactly what is private equity? Well, private equity shares ownership of a company that's not publicly traded or listed. So it's investors either gain control of a company or, or buy a major share, uh, to delist a property if it is actually on um, the stock exchanges. And I'll give you a great example. Like Toys R Us, Toys R Us used to trade on the stock exchange. Private equity company came in and acquired it and, and converted to a private company. So the private equity firms acquires those companies suffering from poor management or financial loss sometimes, not always, but sometimes. And the firm restructures the debts of uh, the acquired company and hires a better skilled team to improve the conditions. Those are great examples to look at, uh, differentiate between the two. But there are oftentimes that private equity can come in and infuse capital into your overall company and work side by side with you, eliminating some of the debt in order to see the company continue to grow. So those are the differences between a VC and a private equity VCs. We're focusing our attention more so on the startup, these early stage companies. Private equity is focusing more so on the more mature type companies. Now that we have that out of the way, let's get back into the title of this episode. Private Equity M and A. Is it smoke and mirrors or is it real for middle market companies now, as a collective growth engine of the United States economy, we all can uh, agree that the middle market companies historically outpace the revenue and the employment growth of both larger companies as well as their smaller company peers. And these companies consistently strong growth rates correlate with a variety of factors. And I would even go as far as to say that many of which have been um, explored in detailed studies that have been conducted by another great organization that we utilize as research here at opg, the national center for Middle Market, um, um, and middle market organizations. So in collaboration with those particular research we've gone through and we've taken a look at a lot of their studies that they actually have and they do suggest that there is a correlation that exists between high growth and the growth that is funded. And companies that deal with private equity. So specifically middle market companies, whether or not it's a full or partial private equity ownership, they do post higher rates year over year revenue. And if we look at the employment and the EBITDA growth, the middle market companies without private equity do not perform as well. And these are all statistics. This is not me sharing my view as far as companies can still grow without private equity. But when private equity gets involved, these are some of the results that have happened. But if you also go a little further, private equity backed businesses report greater confidence in their own capabilities of their companies. And it's fascinating to state that because when you start your company, you automatically go into it with an idea vision where your company is going to go and how your company is going to continue to thrive. But there are times when you can run into a situation where the company is not growing at the pace that you would like it to. The company is, hasn't, hasn't reached that particular level yet. Well, with private equity, as I stated, when they get involved with a company, it does increase the confidence of their overall capabilities but also their performance and the resiliency when it's compared to their non PE backed companies. Again taking year over year comparison of companies employment, EBITDA growth, revenue, confidence level, they're all growing with PE backed companies. Not to say that you have to be a PE company to explore those types of growth because there are companies that have it. But when PE gets involved a lot of things start happening. Now the positive impact that I will say that you receive from private equity and let's even look at it even closer to middle, the middle middle market as well as the lower middle market companies. What does a private equity company do? They come in and they provide capital but they also provide something that is referred to as their operational knowledge, strategic support. Um, private equity can help the lower middle market companies, um, economies, businesses thrive and they move a lot faster than the their larger peers do. So when private equity has long been a driving force I would say in the financial world and if we go back to the dot com era, they were the ones in my opinion that were spearheading a lot of the movement prior to the dot com. So if you go back to the early 80s, private equity played a significant role in the overall growth of the marketplace. So let's keep moving forward here knowing that private equity has been that driving force that we've seen here. It also has this influence not just on the larger companies. We hear companies like the KKRS and the blackrocks that are out there. We're talking about companies investing in the lower middle market economy in the United States. And we already know that the stick that stirs the coffee in the, in the United States for the GDP is in the middle market space. But I can tell you the lower middle market is also a generating high producing segment of that market as well. And private equity knows that and they get involved very quickly and they focus a lot of their attention in that particular space. In fact we talked about, we talked about FactSet, um, as they were giving out their numbers as far as the comparison of companies over the last three months and the sectors that they've been focusing on. I'll share with you some other numbers that are really fascinating when we look at the comparisons of, of, of activity. We went from, we talked about the numbers from 10 to 25, but there's also that under the $10 million 10 million mark revenue there were 1431 deals compared to 1402 this time last year. Now that's only a 2% change but at the exact same time there are undisclosed transactions that have taken place that could be even a little smaller than those 11,000 versus 441 versus 10,386. That's a 10% change. In fact, that is in the comparison of the numbers that we talked about. That is the fourth largest percentage change in those bands that we actually spoke about. So when we look at the middle market, we know that it's broken into three different categories. We have the, the upper middle market, the middle middle market and the lower middle market. The lower middle market, there's a lot of activity that goes on there. There are things that are not publicized in the newspaper or on the business channel, but there's activity constantly going. Uh, as I mentioned to you, they are. Private equity is still the driving force in that financial area, but they have been making their presence known in the lower middle market. And to take that a little step further, again, keep in mind that we tend to focus our attention on the 10 to $100 million. That's defined as the annual revenues for the middle market. But you could actually look at the under disclosed and under 10 million, the undisclosed transaction as well. But let's take a look at how private equity is really making an impact. Whether or not you're the lower middle market or you could possibly be in the middle market space. And I think there's probably four different areas that we could look at to determine this. That's one, uh, um, access to capital, operational experience, job creation, innovation and competitiveness. So let's look at the first one. Access to capital. I would say that one of the most significant benefits of private equity for lower middle market companies is access to capital. And it's not just the lower middle market. I would even say for middle market, period. I would say that there are a significant amount of benefits that come to these particular companies when private equity gets involved. And the reason I'm saying this is because the businesses often struggle to secure funding through traditional means such as banks loans. So when a private equity firm comes along, they provide that necessary capital for a number of things like growth. They can provide funding for acquisitions. They can provide funding for operational improvements, enabling these companies to scale and compete more effectively. So if there's anything that companies would probably say right off the top of their head, where are they seeing the most benefits of working with private equity? I would say it could come down to accessing capital, but it's more than just that because we're talking about operational experience. Now I did mention with VCs, uh, oftentimes that you can m have VCs that will come in and that they can give you managerial and technical, um, expertise. Same thing holds true with private equity, because private equity firms bring more than just money to the table. They offer valuable operational experience and strategic guidance. So what happens now is that by leveraging their industry knowledge, the people that work in those private equity firms, they come in and they help the middle market companies enhance their operation and they improve their efficiencies as well as implementing leading practices. But I will say that not every company that has a private equity company invest in them thinks that, uh, they're going to come in and change everything around. No, what they are coming in to do is enhance what you've already done. So this support can lead to significant improvements in your overall profitability as well as your long term sustainability. Job creation. Of course, everyone wants to talk about job creation because of the mere fact that job creation spells a strength in a strong economy. And regardless of whatever side of the aisle, uh, that you're on, Republican, Democrat, Independent, everybody likes the, the term job creation. So an investment in a middle market company often leads to job creation as well. And these businesses grow, they also expand. They require more employees to support their operations. This is not only benefits the companies themselves, but it also contributes to local economies by providing employment opportunities. And like I said, regardless of what side of the L you are, Republican, Democrat or independent, guess what? Job creation stimulates economic activity. So private equity does get a lot of support from our congressional leaders there because they know that if they're involved, job creation has the potential to take place. And the fourth bullet point I will discuss as far as, um, private equity and the positive impact that it actually has is the innovation and competitiveness. You see, private equity investments can drive innovation. Uh, with the middle market companies across the board and with their financial backing, strategic support of private equity firms, these businesses can invest in R D, they can adopt new technology. R D is research and development. They can adopt new technologies as well as bring innovative products and services to the marketplace. So let's, uh, talk about that just for a moment. Because when a company has job creation, they have their operational experience now. And now what you can do is start tapping into the competitiveness. You can now start looking at expansion. You can now start looking at, uh, taking your product and leaving your footprint in areas that you never thought you would possibly be in. Uh, granted, E Commerce has been a big factor in this, but sometimes it's good to have boots on the ground in those particular areas in order to get your brand out there. And imagine having boots on the ground Getting your brand out there and you do E commerce, that's a win, win. And having private equity supporting you, those things are. And it's like you're looking at a situation where it's a win, win situation for your company. But like I said, R and D, adopting new technologies bring innovative products and services to the market. All of these things can foster a competitive environment benefiting the consumer as well as what the economy. Again, everybody on both sides of the aisle, um, everyone enjoys this now. Access to capital is a positive aspect for the company itself. The operational experience is really good because now you're, you're getting your company to grow. You're looking at leveraging the industry knowledge from the private equity people that can come in and enhance your operation, improve your efficiencies. The job creation is a game changer. It's a game changer along with the competitiveness and the innovation that can come from being involved with private equity. And as I mentioned, the one area that everybody can agree on is the economy. When the economy is doing well, everyone is extremely happy. So when we look at the middle market companies, they're often more nimbler and more adaptable than their larger counterparts. Even the upper middle market companies, I think the middle M market and the lower middle market, they are a little more nimbler and more adaptable to the larger companies. So private equity firms, they make that investment, they come in and help these businesses build resilience by strengthening their financial position as well as their operational, uh, capabilities. And that resilience is crucial during economic downturns. It's no secret we're going through right now. And the trough of money that private equity groups have been sitting on for the last two, close to three years now is really helping a number of these companies. And it enables these companies to weather the challenges that they're going through right now and emerge out of these things much stronger. We're talking about tariffs, we're, we're talking about increasing prices, supply chain disruption. There's a variety. The war that we're going through in. There's a number of things that are going on right now that are causing impact to the growth of, um, a lot of these different companies. But there are positive things that you can do that you can work with. When we deal with private equity now, like I said, we've been waiting for this for 13 months now. And I do believe that we have finally arrived. We've been banging on the door here at ah, opg. It's one of the things that we focus Our attention on is the corporate valuation. So we stay abreast of of all the activity that is going on in the middle market space pertaining to M and A. And we see that the growth that we've been going through has, it's been slow. There's no secret there, it has been slow, but things have been improving. We look at research after research and we can see that the middle market companies with private equity ownership report stronger and more profitable growth than their non private equity backed peers. That says a lot. And if we look at just revenue growth, we had a survey that we were just recently looking at where we could see that trends reported previously by the uh uh survey. From July 2024 through July 2025 private equity backed middle market companies collectively reported a 12.9% year over year revenue growth compared to 10.4 for their peers with no PE investments. And among portfolio companies, 61% experienced double digit top line growth while just 50% of the non PE funded companies reported the same. So these results that I'm referring to right now with these PE funded companies, they often provide sharper focus on efforts to drive growth. That's where their focus is on, is on driving growth. You're listening to business Valuation Real Talk. My name is Stephen White. I am the managing partner of Onyx Partners Group, an independent international business valuation firm providing valuations for corporate valuations, ESOPs, state and gift tax valuations. We're thankful that you've chosen us to listen to this podcast this month as we talk about the intricacy and the exciting world of um, private equity M and A. Is it smoke and mirrors or is it real for middle market companies? Now we spent the majority of this podcast talking about all the benefits and all the things that are available to you when private equity gets involved. Is private equity for everyone? No, it's not. Is private equity interested in every company that's in the middle market space? No, they're not. But as I shared with you about the sectors where there's a lot of deal activity or there's more deal activity than others, think about what sector you're in. Think about where the transactions are happening. If we look at the, the last 12 months of commercial services, there's a 63 uh, deal count, 441 versus 378. Health services 192. Transportation 86 to 81. Retail trade, that one was down 76 to 83. So everything was not necessarily up and even Finance was down 670 versus 802 last um, from this time Last year. But there's a lot of activity going on in various, in various sectors. What sector are you in? And if you find yourself in a situation where you're not a PE back company and you can see where the benefits are for you to be a part of this, I would strongly recommend that you explore the opportunities that may be out there. But just like anything else there's also a potential for a downside. So I don't want to leave you with just everything is just shiny and glowy with private equity. I think it's important for you also to know that there are some downsides for middle market companies including aggressive operational restructuring, um, heavy cultural disruption and a short term exit pressure. So let's talk about those independently from an operation and cultural disruption. What does that mean? Well this is a situation where you could be involved in a loss of control. You're the owner, you're the founder of a company. You can lose autonomous decision making power. As a private equity owners impose strict governance and oversight. There's a possibility of a cultural friction. You know you can have rapid demands for um, a change and alienate long term employees and erode that close knit culture that you used to have kind of like your own family business culture common that is very common in the middle market firms. And of course aggressive restructuring when a private equity comes in sometimes there's going to be a situation where there's aggressive restructuring. So there's cost cutting initiatives and workplace reductions aimed at a quick margin improvements that can hurt the staff morale and daily operations. And then of course there's the financial and strategic um pressures you have short term focus uh where private equity firms typically target exist within 3 to 7 years forcing management to prioritize their short term financial targets. Over the long term you can have increased debt burden because when a buyout often loads the target company with debt to finance that overall acquisition, reducing the cash flows available for organic reinvestment and disruption of relationships which is a very key component of a middle market companies. Because aggressive pushes to optimize vendor contracts and client terms can unintentionally damage long term uh, or long standing commercial partnerships. Now I not sharing those to scare you away from exploring private equity. What are the things that we do here At Ony's partners group we look at both sides of every situation. Even when we're valuing companies. We give you the base case, the best case and we also share the worst case scenario. But statistically if we look at the number of transactions that happen with private equity, they're far more positives than they are negatives if the due diligence is done correctly in the front end. When you jump into private equity without doing your due diligence, without understanding what do you really need private equity to do? That's when things can go sideways. Working with private equity is not smoke and mirrors. Private equity firms are very clear, very concise and very detailed as far as what they are willing to do as they come in and invest in your company investing you. I would strongly recommend when they come knocking on the door, open it and listen to them. Because if your business is at a plateau but yet you know there's still some growth there, perhaps having a private equity firm come in, work with you, take your business to different heights, create more jobs, expand your product line, become more competitive, those are opportunities that could be at your doorstep. You're listening to Business Valuation Real Talk. This is Stephen White, Managing Partner of Onyx Partners Group, and you are listening to our monthly podcast. If you think this podcast could be helpful useful to someone else, please by all means, pass it along. Subscribe to it. You can listen to Business Valuation Real Talk podcasts on any of your favorite podcast channels. And as we like to end all of our podcasts, it's better to know what you don't know than to not know at all. Thank you everyone and I can't m wait to be back with you next month. Sa. Mhm. Sam.