Why are these findings significant?
JM: They first help to understand the significance of the middle market itself. According to the National Center for the Middle Market, these companies, which are defined as having annual revenue of $10MM-$1B, contribute nearly $6.2 trillion to the national economy each year. They also represent one-third of all U.S. jobs. So, when considering what drives the overall U.S. economy, the middle market is a very good place to start.
Over the past two decades, Antares has built one of the largest portfolios of private middle market companies in the U.S. These companies represent a broad cross section of industries. So, when they tell us that they anticipate moderate to strong EBITDA growth over the next year, or expect to increase hiring in the next 12 months, that's something to pay attention to.
The Compass report, which was conducted post-election, also includes views from our sponsors and investors. Their views provide a broader and sometimes alternative perspective on topics such as the economy, M&A activity and market dynamics. Also interesting, all three groups - middle market companies, sponsors and investors - were directionally aligned in their responses.
What do these results mean for the middle market going forward?
DB: It has been our view that ample liquidity in credit markets, renewed optimism for U.S. growth prospects and a more favorable regulatory and tax environment will likely help lift sponsored middle-market M&A activity by 10-15% in 2017. (See Private Debt Investor's February article on "Why Prospects are Brightening.") The results of the Compass report reinforce that assessment of the market as optimism is the prevailing sentiment among the three segments we surveyed.
More specifically, investing and hiring activity are likely to remain high with Business Services, TMT and Healthcare being the industries predicted to experience the most growth over the next 12 months.
Have you noticed any shifts since the surveys were done / the new Administration took office?
JM: For the most part, we have not seen any significant shifts since the survey was completed in early January 2017. Despite uncertainty in areas like trade, immigration and geopolitics, the market has been responding favorably and key economic indicators are up.
One area where we have seen a change is around yields. At the time of the survey (year end 2016), investors had predicted that yields would stay relatively flat on average over the next 12 months. While that is still a possible outcome, we're already seeing yields fall with a surge in repricing activity in the broadly syndicated loan market, reflecting significant new fund flows into the space.
Were you surprised by any of the findings?
JM: We were somewhat surprised by the degree of optimism given a) a fair amount of uncertainty in global markets, b) we live in a volatile world and c) we're late in the cycle - global recessions typically take place once every seven to eight years.
Are the survey results changing how Antares approaches the market in Q1? Or how your clients should approach the market?
DB: As we mentioned, the survey results are in line with our expectations although the level of optimism was somewhat higher than we expected. At Antares, our permanent capital base and unique ability to do unitranche, club or syndicated deals allows us to provide optimal execution and value to customers in various market conditions. On the investor side, we maintain strict underwriting practices and will not chase deals that don't make sense in a frothy market. Bottom line, we're with our clients in good times and challenging ones and our track record proves it.
As for our clients, optimistic prospects for better growth, lower taxes and deregulation are encouraging, but can also be a mixed blessing. Obviously, stronger economic growth is a plus for earnings prospects for portfolio companies and potential acquisition targets. However, rising optimism may also heat up the ever-increasing competition for quality assets at reasonable prices. Lower corporate taxes are a plus, but there may be border taxes and other offsets to consider that could have an impact on certain sectors. Likewise, the changing landscape of regulation will have winners and losers. Clearly, PE firms will be challenged to be strategic in assessing the landscape and continue to look for ways to differentiate themselves as competition remains fierce. The "smart money" will increasingly 1) specialize where they can uniquely add value or see value that others miss, 2) mitigate valuation risk by doing more add-on/tuck-in acquisitions vs. larger transactions and 3) find new ways to innovate and create value by leveraging technology and data analytics to improve operational efficiencies and drive functional best practices across portfolio companies.