Middle Market Deals Are Little Engines Climbing Tariff Hill (1)

Middle market transactions are a bright spot for deals lawyers despite volatility from tariffs, geopolitics and a lackluster stock market.

The transactions—those in the $100 million to $1 billion range—are less lucrative for firms than coveted mega deals, though they benefit from less scrutiny and red tape in an ever-evolving market only a few months into President Trump’s second administration.

“There is more interest in smaller deals—they’re viewed as less risk,” said Eric Tanck, an M&A partner at Nixon Peabody. “If your goal is an exit, you may have better odds as a smaller company in the middle market than a larger company.”

One of the advantages is the ability to provide investors with downside protections. Tools such as growth equity or preferred instruments are seen “more in the middle market space,” said Sergio Urias, a private equity-focused partner at Akin Gump Strauss Hauer & Feld.

“That is an advantage of the middle market compared to large transactions,” he said.

Middle market companies are also more likely to skirt tariffs than large companies. Depending on the sector they operate in, smaller firms “tend to be more regional, maybe have fewer cross-border relationships and maybe import less,” said Nixon Peabody’s Tanck. That could shield these companies from the tariff pressures that large global or multinational companies face, he said.

At the same time, smaller companies with global supply chains or operations may be less equipped to handle disruptions and so turn to sponsors to build resiliency.

“We have seen an increase in founder-owned companies coming to market, possibly for that reason: They aren’t as well positioned as larger PE or VC-backed companies to handle those challenges,” Tanck said.

Private Equity Alternatives

Much of the private equity movement that lawyers observe is focused on utilizing dry powder, instead of selling assets.

“There’s a lot less exits—maybe at an all time high at this point,” Tanck said about private equity firms selling their assets.

Middle market transactions, in particular, aren’t always able to avail common exit strategies such as public market offerings because they aren’t large enough.

That means the market is keeping busy with alternative liquidity strategies such as raising continuation vehicles or net asset value (NAV)-based funds, which leverage the underlying assets of a fund’s portfolio. The space is also bolstered by transactions that sponsors use to drive growth, such as add on acquisitions and investments.

A handful of recent $1 billion private equity transactions include plans by Roark Capital Group, the firm that owns Subway, to purchase Dave’s Hot Chicken in June. The fast food chain was represented by New York firm Olshan Frome Wolosky. Roark was guided by Paul, Weiss, Rifkind, Wharton & Garrison.

In January, Brookfield Asset Management Ltd. announced an investment in Origis Energy, which could exceed $1 billion in the aggregate. Latham & Watkins guided Origis and Vinson & Elkins served as Brookfield’s legal counsel.

The increasing pressure that limited partners are putting on private equity sponsors to return their investments might accelerate activity in the space later in the year, which has been slower than other transactions so far, said Joel Lander, regional leader of BCLP’s global corporate and finance transactions department.

“We certainly have seen more deals with strategic clients in the first half of this year than we have with private equity clients,” Lander said.

Big Law firms have dominated in middle market transactions so far this year. Latham & Watkins worked on transactions worth $26.7 billion, Kirkland & Ellis followed with $24.2 billion in transactions and UK-founded Freshfields rounded out the top three with $12.1 billion in those smaller deals. Firms such as Kirkland and Latham typically rely on a high volume of deals to prevail in the League Tables.