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The Lower Middle Market segment in private equity has been greatly impacted by COVID-19.  Specifically this segment of the middle market has been seeking more lending relief than the larger players.  In fact, more than half of the executives at companies with annual sales of $10M to $50M indicated that they sought special financing to ensure liquidity during the pandemic, and 43% said they plan to do so in the next six months.  Nonetheless there are deals being consummated, and given the environment, virtual Zoom meetings have become the common means for moving things to completion.  Naturally sectors such as telehealth, pharma/biotech, ecommerce (grocery, meal-delivery, and shopping platforms), data centers & data security, as well as many direct-to-consumer businesses have been in focus as high-growth areas.


A large portion of the private equity community focuses on investing in companies at this 5-50M size because of the high growth potential against the involved risks. Skilled buyers can flex their operational prowess as they scale up these companies over a 5- to 7-year period (sometimes more), ultimately commanding a premium valuation upon their exit. Typically, research and due diligence processes in this segment have to be swift and thorough in identifying and evaluating a potential transaction for the GPs.  This has been an ultra-competitive environment

market pyramid

 so it needs to be done in a timely fashion without being outbid. Many lower middle market companies are family-owned businesses with most of the senior leadership occupied by family members and/or original founders.  A new stakeholder coming into the picture must make sure the right people are in the right places as the succession plan is implemented.  The best performing private equity firms understand the importance of effective governance and can help these companies implement practices such as a value-added and independent board of directors, audit and compensation committees, or even conduct third-party reviews of existing strategies.  The goal is to equip the company’s leadership with the ability to better identify risks and make prudent decisions within their marketplace. 


When asked how things have changed in the management due diligence processes over the last couple months, Alex Bychkov, Associate Director of Gryphon’s Business Intelligence team shares that the team has seen an uptick in requests for sourcing inquiries, likely prompted by the new norm in which travel and face-to-face management team meetings are no longer possible. Alex added that Gryphon’s private equity clients rely on sourcing feedback to gain insight on executives’ reputation and performance, ultimately to evaluate their fitness as a potential partner. While sourcing inquiries do not replace the intangibles of in-person meetings, they are in some ways more efficient and provide a broader lens of intelligence, including the “dark side of the moon” that one doesn’t get in-person or from provided references. Gryphon expects the increased demand for this intelligence to continue, as we enter the post COVID-19 era.



 Management team due diligence should be done by both the seller and the buyer, as the strategic fit needs to be fluid for an efficient transition. If it's an add-on transaction, the company being acquired will want to understand how the

business will be integrated with the platform company and/or with other add-ons. Also the add-on company will want to know what their strategic vision is for organic growth and what changes in staff need to take place in order to position their business appropriately for its next phase in its life-cycle.  


Long-term investors understand that this lower middle market asset class can be incredibly rewarding, but the appropriate processes need to be in place to maximize success. Most operating teams emphasize that top leadership in portfolio companies is a significant contributor to meeting investment objectives.  In order to meet the rate of return their LPs expect in what could be a prolonged market dislocation, there's no better time to pay even greater attention to management due diligence process.  


Gryphon’s Due Diligence and Business Intelligence teams provide an efficient and objective third-party perspective on management teams in the pre, post, and monitoring stages for the private equity community.  For inquiries on Gryphon’s Due Diligence and Business Intelligence practices, please contact Richard Finley at for more information as to how Gryphon can help. 






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