Divestitures and Carve-outs in the Top Middle Market Deals

Divestitures and Carve-outs in the Top Middle Market Deals

Private equity middle market deal-making did well in the first half of 2019, matching the pace of 2018, which was a record-setting year, according to a new report from Pitchbook. The authors credit the usual suspects with this continued vigor: lots of dry powder; low interest rates; and continued economic expansion.

Manufacturing deals represented much of the volume of this dealmaking. In the second quarter, four of the top 10 deals fit that description. Also overrepresented in the top middle market deals were the increasing number of companies who have been divesting themselves of assets.

Fundraising figures for the middle market sector were down this last quarter. But despite that, performance was sufficiently good that the mean and median fund size may, when the numbers are final, reach the highest levels on record. The 1H 2019 figures come in at 1,569 deals for a total of $217 billion. The numbers include both debt and equity.

If trends hold, 2019 will be the fifth consecutive year in which middle market deal activity increased as a percentage of PE deal count, the report tells us. The consistency of growth marks a greater prominence for the middle market.

Divestitures and Carve-Outs

Broadview Holdings, by way of its financial sponsor HAL Investments, bought Formica—a maker of laminate products, especially countertops, based in Ohio. This acquisition, first announced in the fourth quarter 2018, closed in 2Q 2019. It was an $840 million deal, which made it the third largest middle market deal to close in that quarter.   

Manufacturing deals like that over Formica are common these days because manufacturing firms are reorganizing themselves: often deciding what core to focus on and divesting themselves of operations outside of that core. Such was the case with Fletcher Building, a New Zealand company that had owned Formica since 2007.

Sometimes a divestiture is complete. The core and the former periphery go their separate ways. Sometimes, though, it is merely a carve-out: that is, there is a sale of a minority interest in a non-core business to an outside entity. PE middle market firms are involved in transactions of both types.

Portfolio companies can prove sticky for PE firms in the middle market. There has been a downward trend in exit numbers, the PitchBook report observes.

In 2Q 2019, GPs of middle market firms exited 176 companies. This was the same count of exits as the first quarter, but the exit value was down by 12.4%. The exit rate, measured either by number or value, was down in 2018 from 2017.

Daniel Barry Q&A

The Pitchbook report includes an interview with Daniel Barry, the senior managing director of Antares Capital.

Antares is a private debt credit manager and a provider of financing solutions for middle market PE firms. Antares has been very active in health care of late. Pitchbook asked Barry to describe the “powerful macro drivers” that are operating in that field He said:

“[A] large percentage of cost of goods sold for care providers is typically comprised of labor, and it can be challenging to retain physicians who are well educated with high net worth. Some care providers may have moderate-to-high levels of concentrations across variables that bear close consideration (e.g. referral sources, key practitioners, clinic locations, payors, etc.) Finally, on the cash-flow front, for some legacy practitioner-owned practices, above average infrastructure needs may require investment post PE buyout for back-office functions such as finance, IT, HR, compliance and business development.”

There has been a lot of consolidation among health care providers, which keeps turning the wheels of an acquisitions- and/or divestiture-oriented equity strategy.

Pitchbook followed up on that question by asking “what additional steps of diligence are taken that Antares views as critical” in this market?

Antares pays “careful attention to the historical and forward-looking behaviors, choices and incentives/motivations for all parties involved including patients, practitioners and referral sources.”

Antares has developed, he added, a good understanding of the needs of their borrowers in terms of liquidity and flexibility facing this industry in transformation.


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