Just before the holidays we caught up with a friend who runs a middle market credit fund. So how was the year for you, we wanted to know? “Beyond crazy,” he said. “Time just flew by so fast. It seemed like every fifteen minutes, I was having breakfast.”
That perfectly captures the velocity in the world of middle market deal making today. There seems to be many reasons for this. One big driver, we believe, is the overhang of capital in both the private credit and private equity markets. Investors have been fundraising at a breakneck pace for years and are eager to put cash to work.
That liquidity naturally spurs competitiveness. The deal cycle has accelerated steadily since the Great Recession, giving both sponsors and lenders less time in the bidding and due diligence process. What used to take three to six months, or sometimes a year, is now down to a matter of a few weeks. Bankers are using the opportunity to create extremely seller-friendly terms and drive up purchase price multiples.
Another factor is where we are in the business cycle. Last year we discussed at length the irony of a Fed move to higher rates just as the rest of the world – and some sectors of US business – was bracing for higher defaults and the increased probability of a recession. Being now a solid seven years into the recovery, public markets are showing clear signs of being at some sort of inflection point.