Antares announced the results of its third annual market outlook survey of middle market private equity borrowers, sponsors and investors. The survey, Antares Compass, examines trends and sentiment related to M&A activity, hiring and the state of the U.S. and global economies.

Antares Compass is unique in its ability to provide a more holistic view of the health and outlook of the middle market by combining insights from three fundamental sets of middle market participants – private equity firms, private equity-owned companies and institutional investors, such as banks, mutual funds, CLOs and insurance companies.

U.S. Economic Sentiment Slips, but Still Favorable

Despite the rocky end for markets in 2018, confidence among middle market participants appears to be holding up well in 2019. Seventy-two percent of all survey respondents expressed confidence in U.S. economic performance over the next twelve months, although that sentiment is down modestly from 81 percent a year ago. Pessimism ticked up five percentage points versus 2018 but remains relatively low at seven percent across all respondents.

On the recession front, almost 90 percent of sponsors and investors see a recession as unlikely in 2019. Borrowers were a bit more apprehensive with 60 percent seeing a recession as unlikely versus 25 percent seeing it as likely. Nevertheless, most borrowers expect healthy revenue and EBITDA growth for their companies in 2019, with 58 percent expecting hiring growth of over three percent.

In contrast to the U.S. economy, confidence has fallen significantly regarding economies abroad. A modest majority of sponsors and investors are now uncertain or pessimistic about the global economy in 2019 versus strong confidence seen a year ago.

“Within the U.S., both the broader economy and the middle market still have positive underpinnings in terms of stability and growth, with some caution flags starting to emerge as we move through the year,” said David Brackett, managing partner and co-CEO of Antares. “In talking to our private equity sponsors and borrowers, continued growth is expected albeit at a slower rate than last year, with an increased focus on ensuring they have sufficient capital and the right people in place to manage successfully through a market correction.”

Deal Activity Expectations Tapered

On the deal front, a majority expect M&A activity to be flat in the year ahead. Out of the balance of respondents, almost twice as many expect a decline as those that expect an increase, suggesting a modest tilt toward the downside in 2019 versus the robust levels seen in 2018. Within the mix of M&A, sponsors expect LBO activity to be flat to less active, while add-on activity tilts from flat to more active. On the leveraged loan front, most investors polled expect volume to decline by three percent to 10 percent in 2019 in contrast to a more flattish forecast view held in early 2018.

“Private equity sponsors have a higher level of dry powder on hand than expected and are eager to invest in companies with strong core growth potential,” said John Martin, managing partner and co-CEO of Antares. “Despite some uncertainty that could impact deployment of capital in some more cyclical industries, investment is likely to remain high within sectors such as business services, healthcare and technology, software and communications.”