The Silver Lining

February 4, 2008

It's February, meaning the New Year still has hardly begun. But, the middle market is showing resilience in the face of a looming recession and while there's not a lot of reasons for mid-sized dealmakers to be sanguine unless they're, of course, New York Giants fans, recent activity in the space indicates that all isn’t as bad as it seems.

Investors are hunting for new transactions even though the buzz word of the day has become portfolio management.

Interestingly, if one form of transaction, particularly the public-to-private buyout can present any picture on the viability of acquiring mid-sized companies, look no further than a recent deal.

Take, for instance, the $487 million acquisition of Stuart, Fla.-based carbonated beverage systems supplier NuCO by Los Angeles private equity firm Aurora Capital Group. Financing for the takeout, which has a 45-day go-shop provision, is being provided by UBS (itself, not exactly insignificant given the overall funk the large multi-billion transaction credit market remains mired in). The large banks were supposed to have retreated en masse from new issues.

Because of the large write downs recorded by very established banks and the shadow of a possible recession it's not to hard to see why the banking community is expected to be more risk-averse this year.

It's also hard not to construe the domestic outlook for the nation’s economy as being fairly dismal. But, it doesn't mean that things look as bad abroad as they do within our borders.

A number of domestic infrastructure funds have been raised to invest cross border. Moreover, KPMG Corporate Finance is of the mind that M&A activity in Africa, the Middle East and Asia-Pacific will outperform either the U.S. or Europe over the next six months. Given all the interest in U.S. assets on the part of sovereign funds from emerging markets it’s not too far of a stretch to speculate that US private equity firms might well look to sovereign funds for co-investment opportunities.

Optimists, meanwhile, can take heed of the fact that fundraising in the middle market is continuing and institutional investors are looking to increase their allocations to alternative investments.

Atlanta's Roark Capital Group, for instance, announced that it had secured $1 billion for its second fund, well exceeding the size of its first fund, a $413 million vehicle. The firm's lack of style-drift from its strategy of acquiring household-name franchise companies, as well as business service outfits, has proven all too appealing for investors.

Hmm. It would seem there’s more to count on than not. And, that’s not exactly a bad sentiment to have when facing the prospect of recession.