Why Buyouts Are Stalled in the Middle Market

Was talking to some middle market investment bankers the other day.  They were not happy with the pace of economic growth in the market.  These are the guys that find and put deals together for businesses that have revenue of $10M to $50M dollars.  Many times its a family run business that could be acquired by a larger business.

These are not the high tech scalable startup businesses that are in the news.  These are the small manufacturing businesses, the service businesses, the niche businesses that provide great value to the American economy.

One of the bankers laments is the big guys are starting to look downmarket for deal flow.  $GS, $JPM etc are under revenue pressure.  There aren’t enough deals at the top of the market so they are putting the squeeze on the middle market bankers.

That’s just business evolving and competition changing.  What they said next was not pleasant.

Business owners aren’t selling.  They aren’t interested in selling.  It’s not because the market is so great.  It’s because they see themselves getting a lump sum of cash and don’t know what to do with it.  The alternatives are put it in the stock market; which they see as highly risky right now OR put the lump sum in bonds where they will earn 0% interest.

Federal reserve policy is gumming up the gears of commerce.

Money isn’t turning over in our economy.  If it were, we would have pretty high inflation given the amount of money that has been created.  Banks have been killed and instead of lending like community bankers used to, they are buying US Treasuries.

Pretty easy to borrow at 0% and invest at 3% if you are a banker.  Lots of golf rounds can be played with that business model.

It was clear that the Federal Reserve 0% interest rate policy and continuous quantitative ease was killing retirees.  It was a bit less clear how it was increasing the economic divide between the wealthy and the middle class.  Only the wealthy can take advantage of low interest rates in a jobless recovery-the middle class fades away.  It was murky when I thought about how business owners were refusing to sell.

The risk/reward for operating a business versus selling it and taking the profit has bent far in favor of continuing to take the risk of operating.

Former Fed governor Laurence Meyer says velocity is not relevant.  I disagree.  I have witnessed velocity in different forms.  Traders used to talk about the velocity of trade.  When one order hit the pit, it caused a chain reaction of several orders to create activity in other parts of the pit.  However, if that one large order was swallowed up by one local, the same activity didn’t occur.  Keynesian thinking doesn’t work in real world economics, and it doesn’t work at the Fed level either.

Concentration and lack of breadth hurts marketplaces in many cases.  Velocity can slow down.  This is one of the dangers of Dodd-Frank.  We are concentrating banking and all the functions around banking into the hands of a few big banks.  At the same time, the government is erecting artificial competitive barriers to make it difficult for new banks to enter and compete.

The policies of the Obama administration have been anti growth, anti business.  The corresponding Federal reserve policy is combining with poor administration policies to really screw up normal business cycle economic incentives resulting in a no growth economy.




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