Market News

All Eyes Are On The Middle Market As Larger Firms See Big Money In Smaller Deals

By Jessie Yount for

Competition for midmarket deal work is heating up.

Falling demand in corporate practices has meant a return to more modest transactions for Am Law Second 50 firms that seized big-ticket deals in the deal boom of 2021, according to firm leaders and industry consultants, and increasingly, large firms are looking to capture work where it is available—and much of it is in the middle market.

There have already been signs of renewed interest in the midmarket in 2023. Though the strategy is not unheard of during economic downturns, the trend escalates competitive pressures in a segment that is already quite crowded and will require changes in pricing strategy for large firms interested in capturing more of the work.

Like large global transactions, midmarket M&A deal activity valued up to $500 million was down year over year in 2022. Deal value fell 26% to $1.1 trillion while volume decreased 15% to 54,419, according to data from Refinitiv. But both measures just topped 2019 figures, when deals reached $925.7 billion and volume hit about 47,950.

That’s consistent with what Kristin Stark, a legal consultant and principal at Fairfax Associates, says she is hearing from a number of firms that she has asked about demand. “A lot of firms are saying [midmarket] deal activity is pretty solid, likening their levels to 2019,” she notes.

Further, in recent interviews, firm leaders say they see significant potential to grow in the space, while others say their midmarket presence has buoyed them in the downturn.

For its part, Cooley threw momentum behind its strategy to take on the middle market when it hired a five-person private equity and M&A team in Denver in late February. The strategy comes as demand has grown among the firm’s tech and life sciences client base, according to Sonya Erickson, leader of the business department at Cooley.

“We’ve been watching demand [for middle-market private equity] grow in our own client base as alternative growth strategies become more central to how they think about the life cycle,” Erikson says. “We see this as a real market opportunity for us.”

Though interest rates continue to curb large-cap transactions, Sonny Allison, a partner in the five-person group, notes private equity sponsors are somewhat buffered from macroeconomic conditions. “Our clients are relatively resilient to macroeconomic trends because they are not relying on the capital markets for financing and tend not to over-leverage deals,” he says.

Elsewhere, Duane Morris is enjoying stability given its longtime focus on midmarket M&A, commercial finance and securities/capital markets work, according to corporate chair Brian Kerwin.

“We’ve been very strategic and that has given us well-balanced growth,” Kerwin says, noting the 200-lawyer corporate department has added about 75 lawyers in the past eight years, has no plans to do layoffs, and is hiring when a need presents itself.

Firm lawyers have both buy-side and sell-side clients, which have been aided by Duane Morris’ commercial finance practice in recent months, Kerwin says. “What makes us strategically placed is that when activity is slow, our commercial finance lawyers are helping buyers look in the distressed market and private credit lenders make loans to companies that may be struggling.”

Kerwin said he expects the use of private capital to continue to increase, given the record amount of capital raised by private equity funds in recent years, coupled with more resistance on the part of traditional banks given macroeconomic conditions.

Meanwhile, Hanson Bridgett managing partner Kristina Lawson says she has been carefully monitoring signs of a slowdown in the corporate realm, but that it has yet to hit the firm’s business section.

“I would attribute that to our midmarket position,” Lawson says. “We serve midmarket corporate clients, often on the sell-side. Demand continues to be strong for acquisitions of those clients.”

Lawson adds that, while midsize regional firms in other geographies such as Salt Lake City may face increasing competition given the recent arrival of Big Law firms, that dynamic isn’t playing out in Northern California. “We are in a stabilized competitive environment,” she explains.

Regional dominance has helped a handful of midsize firms establish strong corporate practices, which may aid larger firms in their midmarket ambitions as well. Taft Stettinius & Hollister surpassed the 800-attorney mark when it acquired 120-lawyer Detroit-based Jaffe Raitt Heuer & Weiss at the end of 2022.

“There are a lot of firms that compete with us and they do well [but] they haven’t taken the broader platform approach that we have,” Taft managing partner Robert Hicks says, referencing the firm’s geographic expansion.

“If you look at what Kirkland has done in the major market, they have an enviable national position in being one of the top dominant law firms in the world,” Hicks continues. “I don’t know if anyone has put their arms around it and said we want to be dominant in the middle market as a brand. Taft has really taken that on as its mission.”

Creative Pricing Strategies

While M&A private equity in particular and smaller firm additions are popular growth strategies, other large firms interested in following demand to the middle market will need to consider a shift in price and staffing, at least for the time being.

“When we see a softening in demand, we tend to see firms being a bit more open-minded and more willing to price and staff for that work,” Stark says. “When there is a slowdown in big-ticket M&A, firms will take on more mid-market M&A.”

That doesn’t necessarily apply to the most profitable firms, but in previous slowdowns, large firms have looked to introduce what Stark describes as creative pricing strategies, such as deal busted or success fees as well as portfolio transactions, where deal volume lends itself to greater profitability.

Fee structures aside, however, staffing is another major hurdle. “Really, where the fees differ is the bench of the team and how many people are put on a deal,” Stark says.

Bob Kadlec, a corporate partner at Duane Morris, concurs. “For a lot of large firms, it’s not the partner time or rate that is necessarily the driver on the bill.”

That gives a firm like Duane Morris an advantage, according to Kadlec. “We might be a tick below other firms [on rates], but we’re efficient and don’t tend to have loads of folks on deals,” he explains. “Even as rates have pushed up, we have a real distinction between associate and partner rates, which is enormously helpful for clients.”

That said, Kerwin adds that Duane Morris will also consider accommodations for certain clients. “We don’t like to compete on price, but sometimes to get our foot in the door with a strategic buyer or a fund, it is worth it, for us to show that we’re every bit as good or better than the more profitable competitor,” he says.

It’s worked, Kerwin says. “We’ve had some clients come back and say, ‘Feel free to raise your rates a bit’ because the value-add is tremendous. That is the highest compliment.”

Rest assured, interest in the middle market isn’t likely to fade anytime soon.

“There’s a lot more activity in the middle market than in the upper market,” Hicks says. “The upper market may drive more dollars, but the actual market activity in the middle market is America.”