With U.S. stock markets near record highs, and M&A activity on-track for another big year, there has been much commentary about whether markets have once again detached from intrinsic value. By and large, the labour market has returned to normality, the housing market has recovered, and consumers are spending again. However, what's missing is any obvious catalyst for accelerating economic growth to drive corporate profits, and thus, boost markets any higher. This is all relatively common knowledge, but underneath this picture is the activity in the middle-market of private companies; an area that has some surprising facts of its own.
Traditionally, middle-market firms tend to be laggards of their public market brethren. This is often the result of their smaller size (which suggests greater risk), and liquidity discounts (because an owner cannot quickly dispose of their interest like an owner of a public company can). Recent experience by our team has turned this notion on its head.
Over the past few months, we were involved in a competitive sale process to acquire a niche-market retail company. This company had been able to carve out a segment of their industry that left them with few true competitors and subsequently had experienced consistent growth. Despite this growth, the company was still a regional player and thus had annual revenues of around $20MM, and EBITDA of approximately $2MM.