Who is Correct, Bain & Co. or Bain & Co.?

On 3/5/14, Mary Josephs wrote for Forbes magazine that based upon a Bain & Co. report, that there were several reasons why middle market companies would not be getting more attention and investment from PE firms in 2014. In her article which is called “Four Reasons Middle Market Owners Shouldn’t Wait For Private Equity” which can be found at: http://www.forbes.com/sites/maryjosephs/2014/03/05/four-reasons-middle-market-owners-shouldnt-wait-for-private-equity/, Ms. Josephs gives a couple of reasons for why this is to be, including:

  1. The big funds are getting bigger in the PE world, and those big funds will have to concentrate on big deals to put all that money ($1 trillion in dry powder) to work.
  2. Limited partners that invest in PE funds – the pension funds, state retirement funds and others – are moving to work with fewer buyout firms, and that process also concentrates more assets in a small number of hands.
  3. A growing amount of PE money is going into refinancing of existing PE deals, rather than buying new companies (and most of those deals are up-market in size).

Yet, in a separate article published in The Street and by The Deal entitled “Bain & Co.: Buyout Shops Thinking Small” Jonathan Braude concludes that “with vast stores of dry powder to deploy and relatively few large assets for sale, buyout firms will likely try to put their money into smaller targets.”

The Street article can be found at: http://www.thestreet.com/story/12513054/1/bain-co-buyout-shops-thinking-small.html

Both authors are quoting Bain, so who is correct?

It is this author’s opinion that the the Braude article is likely closer to the truth. While hundreds of billions of dollars are seeking investments, valuations remain high and larger companies have the professionals and investment banking support to ensure that they stay high. However, PE firms and their Limited Partners are seeking returns and those returns can only come through acquisitions from targets that are under-valued (and likely smaller in size.

Only time will tell but, it looks good for the middle market.