Nick Tell Interview: Market Outlook for Middle Market Fundraising in 2022

Market Outlook for Middle Market Fundraising in 2022

With multiple rate increases likely this year from the Federal Reserve and a continued tapering of securities purchases, the tightening liquidity in the economy will become a key theme for middle market companies raising capital.

As public markets continue to look poised for a correction and investors seek to de-risk portfolios, private equity and debt markets will also see the ripple effect and an impact on the ability for small and mid-size companies to get access to funding.

Armory Co-Founder Nick Tell shares his market outlook on what the current environment means for raising capital:

What will be a key macro theme influencing the fundraising environment for SME to mid-market companies this year?

The main fundraising challenge for private growth companies in 2022 stems from the collapse in valuations for public growth companies beginning in the 4th quarter of last year and accelerating into this year. This “risk off” trade in the public markets not only affects the valuation for these companies but also investor appetite for growth companies, particularly those with little or no free cash flow. This partly relates to concerns about the rising rate environment, impacting DCF analysis for these types of companies. However, it also reflects growing concern that cash flow projections in general for these companies are suspect and therefore difficult to value.  

How can companies position themselves well for fundraising in a tighter environment?

To address these concerns, high growth companies will need to focus on ways to create credibility behind their assumptions to generating free cash flow over time. The best way to do this is to point to historical examples in their industry where other early growth companies used different techniques, like consolidation, operating leverage, industry dominance, to achieve substantial free cash flow and then lay out a plausible business plan utilizing those techniques to achieve that goal.