While a general decline in deal size and volume has been a common theme over the last year and half, certain areas of the market remain busy. A recent article in Institutional Investor states that lower middle market investments in founder-owned businesses have been “chugging along” for the last year and a half, with deals valued under $100 million representing 61.5% of global mergers and acquisitions.
This reported activity aligns with our internal numbers, too. Of our 2023 U.S. submissions, approximately 53% comprise of sub-$100 million dollar targets, the highest percentage we have seen in any year since we started underwriting in 2016. The activity on these deals has remained steady, in contrast with submissions for higher middle market and larger M&A deals, which have fallen over the last 18 months. In fact, the number of lower middle market deals we saw through the first six months of 2023 is on pace to match the amount we saw in 2021, a high water mark for overall M&A activity.
Within the lower middle market, Institutional Investor also suggests a specific subset has prominently emerged: founder-owned businesses, which represent 43.5% of the value of all deals. While these opportunities are flourishing, these types of transactions can be tricky in both diligence and deal process. In some cases, the targets are less sophisticated and harder to diligence than institutionally owned business. Oftentimes too, founders will stay on to assist the buyer in running the business, which can create challenging relationship dynamics if the parties discover previously unknown issues with the business post-closing.
The increased risks of lower middle market and founder owned deals make using RWI a very useful tool. Rates for RWI have fallen drastically in North America due to the lack of volume of larger deals, leading to near-record lows. With overall pricing lowered, we understand sophisticated buyers and deal parties are increasingly willing to spend a bit more to work with carriers with the most experienced underwriting and claims teams. Our team knows lower-middle market deals, and can ensure a smooth deal process by anticipating issues up front and we provide efficient claims handling should any issues arise post-closing, allowing buyers to focus on value-add and a strong relationship with the founder post-closing.
Please reach out to your insurance broker or any member of the Euclid Transactional team for more information on how RWI can facilitate your prospective transaction.