Select Language



No match found


No match found


No match found


No match found


No match found


No match found


No match found


No match found

Private Capital Seizing the Stage in U.S. Middle Market

resource image
  •  Minute Read Clock/
  • ListenListen/ StopStop/
  • Text Bigger | Text Smaller Text


Move over public markets, because there’s a new kid in town - well, sort of.

It’s called private capital, and while it may have been around for decades, a confluence of factors ranging from volatile public markets dallying with bear territory to fears of stagflation and a recession have turned it into the fastest growing area in finance, especially in the United States.

Made up of family offices, high net worth individuals, global public pension funds, sovereign wealth funds, sponsors and some insurers, private capital now represents more than $19 trillion in investments, according to conservative estimates, and that figure is set to grow exponentially as the investor class looks to deploy mountains of patient capital into the U.S. middle market and drive the next generation of American growth companies.

“It’s such a deep market in the U.S. and every private capital investor in the world wants to be in it,” says Sandra Taube Godard, Toronto-based Managing Director for Private Capital at BMO Capital Markets, noting that Canadian pension plans are leading the charge from the perspective of global public pensions, evolving their strategies to take advantage of opportunities to invest in U.S. firms.

“We have a record amount of capital looking for private investments and as people shun the volatility of public markets and pure growth for growth’s sake, they will increasingly be hungry to partner with middle market firms that are recession and stagflation proof,” said BMO Capital Markets’ Managing Director for Private Capital Grant Thompson who, together with Godard, manages BMO’s Alternative Capital Solutions group.

Godard and Thompson are among the growing number of bankers tasked with driving partnerships between private capital and U.S. middle market companies, most of them private, that are looking for long-term growth capital and eschewing public markets.

Turbocharged Growth

Several factors are conspiring to make private capital more attractive to U.S. firms in search of capital than public markets, including stock market volatility, inflation at its highest in decades, and the prospects of stagflation or a recession.

Thompson estimates some 50,000 upper middle market firms in the United States fall into this category, many of them with billion-dollar-plus revenue. These firms, he says, have solid management teams and are looking for long-term financing to take advantage of growing market dislocation to acquire competitors.

“We think there’s a storm brewing,” said Thompson. “You’ve got this huge number of companies that should move in these pending environments.”

The attraction of private financing for these companies lies in the fact that it is differentiated from public markets; private capital partners are not interested in restructuring companies and putting them up for a quick sale, and they are willing to take minority stakes and invest across the capital structure and according to time horizons that can extend out decades in some cases.

“It’s patient, long-term horizon minority capital that does not want to meddle with your management because you are doing really, really well,” says Godard.

“Private capital investors will get to know the companies and wait for them to be ready, and then they’ll say, ‘What works for you? What do you need? What’s your time horizon,’” she said, noting that private capital represents a one-stop shop that allows companies to wrap financing structures around their management teams, business models and the opportunities they are pursuing. “It’s, ‘We’ll put in chunks of minority capital and any form of debt or equity and everything in between to help you grow or transition, either organically or by buying a competitor.’”


Last, but not least, is the momentum behind private capital, a wall of wealth that is cresting and looking for a home just as public markets weaken; U.S. stocks entered bear market territory in June for the first time since the Great Financial Crisis even as the U.S. Federal Reserve raised its benchmark rate by 0.75 points, the most in a single shot since 1994. In July, the Fed raised rates by another 0.75 points.

On the one hand, you have a big wall of private capital, and on the other you have the biggest, most mature and legally sound market in the world... 

As word gets out among U.S. firms about investments in their peers from the likes of foreign public pension fund giants like Canada’s CPPIB, with $500 billion in Assets under Management, middle market companies are starting to take notice of a pool of capital many did not even know existed. “When you have hundreds of pitches and transactions, word starts to get around. That word will start to resonate more loudly, in the future economic environment,” said Thompson, adding that momentum is further buoyed by the slow retreat of investors from public markets – there are half as many public listings on U.S. markets today as there were two decades ago - even as overall global wealth rose. To be sure, private capital has also maintained public markets’ exposure, but that has been steadily falling as a percentage of their portfolios and in favor of private allocations.

 “The message is getting out there,” said Thompson.

Commercial Bank Partnerships

It’s a trend that banks operating in the United States are responding to, including BMO, moving to leverage longstanding ties with commercial middle market clients to broker deals with not just American family offices and high-net-worth individuals, but also with global public pension funds.

“With so much excess capital looking for ideas, origination is the scarcest and most valuable resource,” said Godard, who has built a career dealing with the Canadian pension funds. “Banks with large corporate, and in particular mid-sized, commercial footprints have a structural advantage.”

She noted too that it is a two-way street, with pension funds and other private capital pools increasingly wanting to partner with banks to source relationships and deals that preclude the need to bid on assets in expensive auctions.

Similarly, upper middle market companies are keen to leverage the ties and experience of large private funds pools that can help them find synergies with other companies in their portfolios, domestically and abroad.

Shifting Deals Themes

Going forward, sectors will likely include recession-proof companies that produce essential goods and services, for example in the sustainable food space, where they can pass along price increases to the consumer.

“They (investors) don’t need to back the next Uber or the next Tesla,” said Thompson. “But they do want to back the next company that works out new ways to package food and ship food, because people are always going to eat food.”

The themes of climate change and the great energy transition are also part and parcel of emerging investment trends.

“What’s the biggest effect of climate change within the U.S.? It will be the immense pressure on things like power infrastructure,” said Thompson, predicting growth for goods and services companies involved in the supply, distribution, and transmission of power, even down to power transformer makers and generator makers.

“Nobody doubts that we’re going to be using more energy in the future,” he said. “All of our investors firmly believe in climate change.”

Other long-term themes in the crosshairs of private capital include ways to serve an ageing population – including anything from pet care to vacation cruising – transportation and rail services, supply chain security and commercial real estate, among others.

Moment of Opportunity

The opportunity set for the middle market firms with the wherewithal to grow cannot be understated.

These are the firms who stayed on the sidelines in the recent years of a shark-feeding frenzy that saw SPACs (Special Purpose Acquisition Companies) roar onto the scene and broader, publicly announced M&A hit all-time highs in 2021.

Times of volatility are synonymous with opportunity, and Godard and Thompson say the new macroeconomic vista will not be an exception. Middle market companies, they said, will be taking advantage of market dislocation to buy competitors, if they can access the right kind of financing.

While not a phenomenon limited to the United States – high inflation is forcing banks around the world to raise interest rates rapidly – it is one that may be best tapped via exposure to U.S. companies that are the backbone of the U.S. economy, providing the majority of employment and creating the bulk of its goods.

“On the one hand, you have a big wall of private capital, and on the other you have the biggest, most mature and legally sound market in the world,” he said. “So that is where the bulk of the investments want to end up.”

Read more
Grant Thompson Managing Director, Private Capital


Brian Belski’s 2022 U.S. Market Outlook

Brian Belski December 09, 2021

  In his 2022 U.S. market outlook, BMO Capital Markets’ Chief Investment Strategist Brian Belski explains why, even amid concerns aroun…


The Current and Future State of the Global Supply Chain

Fadi Chamoun, CFA February 17, 2022

  BMO recently held an event to discuss the current state of supply chain bottlenecks, strategies for managing the crisis and when we can exp…


Why SLLs Have Only Just Begun to Roar

John Uhren March 01, 2022

  When Enbridge Inc. launched its inaugural C$1bn Sustainability Linked Loan (SLL) in February 2021, it marked a milestone not only for the c…


Amid the Pandemic, Market Structure Continues to Evolve

Joe Wald April 01, 2022

  Change is on the horizon for electronic trading as the U.S. Securities and Exchange Commission revisits regulatory reforms in a market that…


State of the Union: What Lies Ahead

Brian Belski, David Jacobson, Michael Gregory, CFA April 21, 2022

  Russia’s invasion of Ukraine has brought uncertainty to domestic and foreign policy as well as to the economy and the markets. It com…


New Normal Yet to Come for Metals Prices: BMO Mining Panel

Colin Hamilton May 12, 2022

  Prices for base and industrial and precious metals are flying high, but experts gathered at this year's BMO Global Metals and Mini…


Amid the Supply Chain Woes, Supplier Wellness Takes Center Stage

Reg Butler June 02, 2022

  There have been plenty of headlines about how backlogs in the supply chain are causing headaches for both companies and consumers. Those ch…


Key Takeaways on Ag, Food, Fertilizer & ESG from BMO’s Farm to Market Conference

Dan Barclay May 26, 2022

  Join BMO’s Dan Barclay, Bert Powell, Joel Jackson, Ken Zaslow and Doug Morrow in this special episode from BMO’s IN Tune Podcas…


M&A Markets Active Despite Macroeconomic Backdrop

Warren Estey May 19, 2022

  As much as deal-making has cooled in 2022 - dampened by market volatility, geopolitical uncertainty, the ongoing fight against COVID-19 and…


Supply Chain Disruption: Key Challenges and Opportunities

Fadi Chamoun, CFA September 01, 2022

  New look, same great content! We’re proud to launch Markets Plus, our new podcast, where leading BMO experts share a wealth of timely…


Achieving Returns in an Accelerating AI Environment

David Wismer October 19, 2022

  From improvements in Machine Learning and the development of new database systems to the development of sector-specific tools, significant …


North American Investment Strategy: 2023 U.S. Market Outlook

Brian Belski December 21, 2022

  While 2022 has been “a year we’d like to forget,” 2023 will be the start of the multiyear trend toward normalization. In …


Managing and Monetizing Your Transition to a Net Zero World with BMO and Radicle

Eric Jacks December 01, 2022

  When Calgary-based Radicle Group Inc. was formed in 2008 in Alberta as the first North American compliance market, the climate change narra…


The Importance of Financial Forecasting

February 22, 2023

  Forecasting and predicting the future. They’re the same thing, right? Not really. We all make predictions at some point. Many of u…


Why Water Access Should Be Part of Your Risk Metrics

Alex Baniczky April 20, 2023

  In the current tally of key risks and mitigants it’s easy to feel that the risk side of the equation is having a banner era; with bus…


Understanding the Link Between Cybersecurity and ESG

John Uhren, Andrew Matheou February 02, 2023

  John Uhren is joined by Andrew Matheou, Head of BMO Capital Markets Global Transaction Banking, to discuss the topic of cybersecurity, and …

You might also be interested in