Why the mid-market segment is so attractive to fund
Epsilon Direct Lending’s Joe Millward explains why the booming mid-market space is fertile ground for quality private lending opportunities.
The mid-market is a critical yet often overlooked segment of the economy.
In Australia, there are around 35,000 mid-market companies, each generating revenues between $25 million and $500 million. Together, they play a vital role in driving economic growth, employment, and tax revenue, according to Epsilon Direct Lending.
Many of these companies have significant growth potential, particularly through mergers and acquisitions (M&A). However, securing financing for such deals can be challenging due to the unique nature of each business.
Private lenders like Epsilon are recognising the immense opportunities in this sector, especially within M&A. While banks face limitations in offering tailored solutions, Epsilon steps in with senior secured loans to help facilitate acquisitions and support business growth through strategic investments.
In this episode of The Pitch, Joe Millward, Founder of Epsilon Direct Lending, shares insights into the compelling opportunities in the mid-market, how Epsilon deploys capital, and the rigorous due diligence process that drives their successful investments.
Edited transcript
What makes the corporate mid-market such a compelling opportunity for private lending?
It's a large, stable segment of our economy and our population, our country, relies on the mid-market. It's one of the largest employers as a segment. It's one of the largest taxpayers as a segment.
It's huge in terms of contribution to GDP, about 35,000 companies in what we call the middle market. That is, companies with turnover of between $25 million and $500 million, typically with 20 to 200 employees. So it's a really deep, diverse segment of our economy.
Normally these companies, you won't think about them, you won't notice them, but they're performing a critical role in your day-to-day life.
And so, we love it because it's so diverse, it's so deep, it's so stable. It's not kind of subject to the ebbs and flows of large capital markets and headlines. It just keeps on keeping on.
How does Epsilon deploy capital to generate returns in this segment?
What we're doing is supporting the growth of the segment that I just described, the middle market, and typically that growth is an acquisition that's being taken out by a company.
Sometimes it's a private equity firm that is buying that company. Sometimes it's a multi-generational family that owns a company as buying a competitor. Other times, it might be an expansion into a new geography or a product.
We're providing senior secured lending to support that acquisition. In the example of an acquisition, we're funding, say, 30, 40% of the value of the acquisition, the enterprise value of the company that's being acquired, and then a private equity investor or a high-net-worth investor is funding the other 60 to 70% with equity capital.
How do you sort out good deals from bad in your due diligence process?
We're only lending to profitable companies. We require our borrowers to have at least $5 million of earnings, and typically they're a market leader, number one, two, or three in the niche, the segment that they occupy in whatever market. So they're a critical services provider.
They're a critical goods manufacturer, a healthcare business, and education platform. These are essential goods and services supporting our economy.
So, we screen for those kind of quality elements and we really focus on the sustainability and predictability of that $5 million or more of earnings in order to support our loan. How do we validate that? Well, we do a lot of due diligence.
So we'll get a comprehensive investment memo that's provided by the buyer of the business with a three-way financial model looking at the companies or the target's P&L cash flow and balance sheet. We'll have all their financials inspected by a top-tier financial advisory firm, a KPMG at Deloitte who does financial due diligence and tax due diligence.
We'll get a management consultancy sometimes to do commercial due diligence on the competitive landscape and the reason this company exists. We'll get legal due diligence performed by a top law firm sometimes that looks at contracts, employee positions, and so on and so forth.
Lots of paperwork that support our investment thesis, which ultimately focuses on how sustainable and predictable that earnings base is, and we structure off of that when providing the loan.
What’s the difference between sponsor and non-sponsor deals?
By sponsor, we mean that a company is owned by a private equity firm. We're dealing with middle market private equity firms in Australia, buying Australian companies. So that's what sponsored means, is the sponsored by a private equity house who is acquiring them to support their growth.
Non-sponsor simply means there's no private equity house involved, and that typically means that there's an independent shareholder owner, sometimes shareholder manager, who is running that business.
Typically, when we lend to those companies, they're multi-generational family-owned businesses that have decided not to sell out to a private equity sponsor, but to continue to keep the business within the family and support its growth.
Can you give us a real-life example of a current investment opportunity you're backing?
We have recently funded a loan for a private equity house who specialises in healthcare assets, and that company is one of the largest clinical trials businesses in Australia.
Australia's a wonderful place for clinical trials because it resides in the southern hemisphere, so it gets an overweight share of the global testing market for things like seasonal vaccines, flu vaccines, which require annual testing as new strains are released.
So, we've got a wonderful positioning as a country to support clinical trials, and this company is the market leader. It's been around for a very long time. The private equity house has bought this business to support its ongoing growth and expansion as the industry supports critical development of drugs to support our healthcare system.
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Vishal has over 15 years' experience in financial journalism and has a particular interest in property, exchange-traded funds (ETFs), investing strategy and financial history.
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The information contained in this video has been prepared by Epsilon Direct Lending Pty Ltd (ACN 636 861 464) (EDL, Manager or Epsilon). Epsilon is a corporate authorised representative (number 001281871) of Epsilon Investment Management Pty Ltd (ACN 680 224 284) the holder of AFSL number 564491 and is given to only 'wholesale clients' (as defined in the Corporations Act 2001 (Cth)). By receiving or viewing this video, you are representing that you are a ‘wholesale client’ and that you will keep this video and the information therein confidential including not to provide it to retail clients. No financial product advice is provided in this video and nothing in it should be taken to constitute a recommendation or statement of opinion that is intended to influence a person or persons in making a financial product decision. Any advice given by EDL, its associates or related parties in connection with this video is general advice only.
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Vishal has over 15 years' experience in financial journalism and has a particular interest in property, exchange-traded funds (ETFs), investing strategy and financial history.
Expertise
Vishal has over 15 years' experience in financial journalism and has a particular interest in property, exchange-traded funds (ETFs), investing strategy and financial history.
Expertise
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