There is a great article in today's New York Times discussing the titans of the buyout world and the current circumstances that they find themselves in.  Whereas most of the brouhaha over the past quarter has centered around either the sub-prime fiasco or the inability to place debt for PEG's "mega deals," this article discusses the current state of the deals that got done. 

Here are some of the great takeaways... 

The Deals that Got Done are Hurting

Thats right, to the surprise of pretty much no one, those massive deals came along with a huge pile of debt that the operating company needs to work off.  But with faltering markets, some of those companies are struggling to keep up with debt payments on high yield bonds and other loans.  The Times points out, in particular, Realogy, Freescale Semi-conductor, and a few others whose bond yields are trading well down - indicating the market thinks they might default.  

Clearly this isn't a good thing for the larger PE market.  PEG's make massive profits by using massive amounts of leverage.  Now not only is the leverage not available, but every Board will also be taking a hard look as to whether a buy out group will really be able to consummate a transaction.    

Going "Down Market"

The Times also pointed out that funds like Blackstone and KKR are going "down market."  Blackstone hasn't actually closed a deal over $2bn since early last year- having bailed out of a few along the way.  What's more, Blackstone indicates that they are going to actively start pursuing smaller deals.  

No, that does not mean you should expect Henry Kravis or Stephen Schwartzman standing outside your $25m company any time soon.   But invariably we see downward pressure in the M&A markets.  If big funds are looking down market, smaller funds will find themselves with unwelcome competition and look south themselves. 

We see this as a positive for the middle- and lower-middle markets.  Deal valuations have always been more realistic in this segment- meaning deals here are still getting done.  Add some more competition from the buyer side, and we feel confident that the implication is health deal flow at the lower end of the M&A market.