We anticipate that U.S. middle-market transaction volume will stabilize after a 30% decline in 2015. Equity sponsors still have significant “dry powder” to invest, and in addition to change-of-control transactions, sponsors are aggressively pursuing add-ons to support portfolio company growth. Ample liquidity will be available to support these transactions, especially from non-bank capital providers.
There is widespread concern about market dynamics so far into the credit cycle, yet we believe U.S. companies generally will be stable and that most industries will experience modest growth. Several sectors including healthcare, technology and businesses providing goods and services at moderate price points are expected to be particularly appealing opportunities.
Indeed, Bloomberg and a number of other sources, as well as the timing of the Fed’s long-awaited rate increase, suggest that the economy still has room to expand.
Yet 2016 does not look entirely rosy for sponsors. Competition for the best acquisition targets will keep valuations high. If the economy softens, it may create a disconnect between seller and buyer valuation expectations that could make deals more difficult to complete. As discussed, terms are shifting and pricing for new deals may rise.
Sponsors will respond to these challenges by consistently choosing experienced, relationship-driven non-bank lenders that have proven their ability to offer flexible terms to address complex deals and maximize enterprise value. Sponsors will also seek lenders that have a track record through numerous cycles and a collaborative approach to resolving issues.
Originally published in Private Debt Investor’s February 2016 issue