How Private Capital Dealmakers Are Navigating Today’s Middle Market

Key Takeaways from the ACG Mid-South Capital Connection Event in Nashville, Tennessee, 2024. 

This year’s ACG Mid-South Capital Connection Event in Nashville brought together a vibrant mix of alternative asset professionals, from private equity investors to mezzanine lenders and investment bankers, all converging to discuss the pulse of the middle market.

A significant portion of the discussions revolved around market trends and valuations for middle market companies. Topics ranged from the challenges of establishing pricing baselines and employment metrics, to the debate over whether recent valuations signify a new normal or an anomaly. And notably, there’s been a surge in seller rollover equity and subordinated debt, underscoring the evolving dynamics of deal structuring. 

Here were our biggest takeaways for dealmakers:

Are recent valuations the new normal?

Valuation multiples, pivotal in determining purchase prices and subsequent investment returns, are under the spotlight. The consensus was that capital is experiencing a surge in cost. With interest rates climbing, private equity firms are grappling with heightened borrowing expenses to fuel their acquisitions. This spike in capital costs not only diminishes the allure of potential deals but also directly impacts a firm’s capacity to generate preferred returns. 

And despite the inherent unpredictability of market dynamics, the show must go on, so attendees explored strategies to navigate the challenges of deal origination and dealmaking. Among the strategies discussed were adopting value-oriented investment approaches, conducting comprehensive industry analysis, implementing operational enhancements, and employing effective timing and exit strategies. 

Creating a repeatable cash flow model.

In addition to navigating market uncertainties and strategic considerations, having a repeatable cash flow model was discussed as being paramount for private equity investors. A robust cash flow model provides invaluable insights into a target company’s financial health, helping investors gauge its ability to generate consistent returns over time. By meticulously analyzing cash flows, investors can identify potential risks, assess the sustainability of earnings, and make more informed investment decisions. Moreover, a well-constructed cash flow model serves as a crucial tool for scenario analysis, allowing investors to stress-test their assumptions and evaluate the impact of various market conditions on investment performance. Ultimately, a repeatable cash flow model not only enhances investment decision-making but also contributes to the long-term success and profitability of private equity investments.

How are private equity investors creating a repeatable cash flow model? Data and technology. Firms that have a data-driven approach to understanding their business and investment performance are able to analyze historical data, market trends, and other relevant factors to forecast future cash flows with greater accuracy and efficiency. 

AI’s role in dealmaking. 

Again, is it even a 2024 event without the topic of AI being top of mind? Amidst the enthusiasm surrounding AI, concerns about its ability to be in compliance with evolving regulations arose. Industry experts emphasized that AI should be viewed as a tool to enhance productivity and efficiency, rather than a threat to human involvement or fact-checking. Just as a summer intern transforms the way we interact with admin tasks, AI represents a natural progression towards greater automation and synthesis of data within private equity platforms and tech stacks.

There’s a clear need for data quality, data visualization, and data analytics in private equity, so the integration of AI into private equity deal flow processes represents a paradigm shift in the way firms approach data analysis and decision-making. By leveraging AI strategically and adopting a progressive mindset, businesses can unlock new opportunities, streamline operations, and gain a competitive edge in an increasingly data-driven world. As we navigate this AI revolution, one thing remains clear: the future belongs to those who embrace innovation and adaptability.

Want to hear more about the ACG conference or how technology can support your firm’s evolving needs? Let’s connect!

For more ACG information, check out our ACG St. Louis DealSource Event recap.