The middle-market investment banks serving a great swath of the American economy are coping with change on at least as great a scale as the giants of Wall Street over the past several years. The same information and globalization forces transforming "bulge bracket" banks (and so many other segments of the American economy) are also causing change among the firms that help midsize companies with their capital-raising and merger-and-acquisition needs.
Middle-market investment banking has always been a bit of a cipher to the American public and the business news media. The deals middle-market bankers work on don't usually involve high-profile public companies, and given the closely held status of most of the banks' clients, there typically aren't many sexy details released when closing day comes around.
And yet the volume of middle-market mergers and acquisitions is astonishing: According to one report, 2012 saw more than 11,000 M&A transactions involving companies worth less than $500 million, with an aggregate deal value of $289 billion and more than $13 billion in fees generated.
Middle ground between Main and Wall
For most of the last 50 years, middle-market companies have relied on small regional investment banks to help engineer their necessary M&A and capital-raising transactions. Every major city had a few "go-to" firms, and in many cases those firms' employees would break out on their own to form "single shingle" one-man deal shops.
But the landscape is starting to change significantly. Investment banking clients, in particular, have begun to vote with their wallets, often seeking bankers with very specific-industry deal-making credentials. This trend toward clients preferring specialists goes against the traditional grain of many middle-market firms, which historically have employed stables of M&A generalists with mostly pro forma nods to industry and product-oriented verticals.
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But in a world of ever more transparent information, many sellers are looking for an edge they hope will give them a higher price or better deal terms. To find it, they're often turning to the firm or banker that closed the most recent deal in a given space. Investment banks are responding by increasing the focus and specialization of many of their bankers, and that in turn has set off something of a consolidation scramble as many firms in the industry seek sufficient scale to cover multiple industry verticals.
It's not always clear, though, that mirroring Wall Street's specialization patterns is always the right prescription for middle-market deals. Managing the sale of a $75 million business is a very different process from managing a multibillion-dollar deal: There are fewer hands on deck (shallower pockets mean smaller, more multitasked legal and accounting teams, and smaller company executives are often stretched to the breaking point) even as the bankers themselves are asked to wear multiple hats—including, on occasion, that of a psychologist—as entrepreneurs with very personal connections to their business go through the emotionally taxing process of selling their creations.
The new norm
A four-tiered structure is emerging in the middle-market investment banking industry—all of which exists below the radar screen of the average bulge bracket firm:
1. National full-service middle-market firms
A small handful of firms (such as R.W. Baird, William Blair and Piper Jaffray) have established national practices with a broad range of industry verticals. Some of these firms have related wealth management or private equity arms and are often descended from old-line financial or brokerage firms.
2. National advisory-only firms
There's been significant consolidation among these companies over the past year, with Big Four accounting firm Deloitte swallowing McColl Partners, and Piper Jaffray acquiring Edgeview Partners.
3. Single-industry boutiques
Some firms have narrowed their exclusive focus to a single industry, ranging from biotechnology and media to basic industries. These firms tend to be based in single offices and have small teams of a few dozen bankers or less.
4.Small generalist firms and individual proprietorships
A danger zone of generalists and "single shingle" bankers. These players still exist in the market and get small deals done from time to time, but these regional and "lifestyle" firms are increasingly struggling in a tight and competitive landscape.
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My national advisory-only firm recently completed a merger with San Francisco-based MidSpan Partners. We believe it lets us be more focused on specific-industry verticals, most of which are technology-enabled in one form or another. It gives us a national footprint—critical in the less and less regional, more and more liquid middle-market deal world—and it puts us more in tune with the future we see emerging.
Even though my firm is trying to respond to what we're hearing from the marketplace, it's not always clear that Wall Street's way of sorting the world is appropriate for all middle-market clients. The criteria for hiring a good middle-market M&A advisor still rests on the track record of the firm and the specific bankers involved, experience in the quirky turns that smaller M&A transactions can take, and the amount of attention and bandwidth the client company can realistically expect to receive for its deal.
With increasingly active universes of middle-market private equity firms and earnings-growth-hungry public companies, the quick pace of middle-market M&A deals is likely to increase in 2014. Market leaders in the oft unseen world of middle-market investment banking will have to find a way to keep pace.
—By Mike McGill, co-founder and managing director of MHT-Midspan, a Dallas, Texas–based middle-market investment bank, and member of the Young Presidents Organization
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