• MiddleGround’s Fund III could make up to 12 platform investments
• Focus on core investment strategy helps mitigate tariff exposure
• Deal opportunities include corporate carveouts, take-privates

Despite ongoing market volatility, MiddleGround Capital still plans to deploy capital on new deals, Christen Paras, a partner and co-head of transactions, told Mergermarket.

“Of course, there will be some impact depending on how this all settles out,” said Paras. “But we continue to stay disciplined on our core investment strategy when evaluating deals, which helps us to mitigate a lot of tariff exposure.”

The sponsor has largely deployed its second fund, which still has some capital left on hand for add-ons for existing portfolio companies. Fund II, along with an adjacent Mobility Opportunity Fund, closed on a combined over USD 1bn in September 2021, according to a press release.

MiddleGround is now deploying its Fund III. Last year, Mergermarket reported that the sponsor was fundraising for the vehicle, which would likely pursue up to eight to 10 acquisitions. There is potential for as many as 12 deals depending on where the fund closes, said Paras.

The sponsor made several investments last year, with three deals done in Europe. Last July, MiddleGround took a majority stake in UK-based manufacturer Integral Powertrain Ltd. (Helix) out of Fund II. This was followed by an acquisition of Germany-based Stemmer Imaging in November from Fund III.

Tariff impact

This comes as dealmakers have been left shaken following the US administration’s imposition of tariffs on trading partners, as reported. Despite instituting a pause on reciprocal tariffs for 90 days — minus on tariffs for Chinese goods — the whiplash has left many companies and sponsors unsettled by the sudden policy shifts.

Like many peers, MiddleGround entered the new year expecting better prospects after “performance within several industrials verticals had begun to improve and an administration change many were hoping would be conducive to deal-making”, said Paras. The unpredictability around tariff policy and geopolitical climate in a higher interest rate environment has complicated forward planning across the board, however.

“Hopefully, as the environment normalizes, deal-making will pick back up, but the current chaos and uncertainty are not good for any market,” said Paras.

Paras added that MiddleGround continues to stay disciplined on its core investment strategy when evaluating new deals amid a fluctuating policy environment. In the middle market, where it operates, the sponsor forgoes using a large amount of leverage on its deals, and is staying mindful about the financial health of its portfolio companies at a time of high volatility.

At the same time, MiddleGround has worked to keep its LPs informed of what impact tariffs could have on its portfolio. To this end, Paras said the sponsor will pull a page out of its playbook from the early days of the COVID-19 pandemic by providing investors with ready updates on how the situation is unfolding. “Given our focus on investing in domestic manufacturing and supply chains, our exposure is certainly less, relative to others active in the same spaces,” Paras said.

“We’re going to do something similar with tariffs where we’re tracking it routinely and we can provide regular updates because they want to know in as real time as they can, and we’re still digesting it,” she continued.

Dealmaking bright spots

Even amid the current uncertainty, Paras still sees opportunities for deals to get done. In North America, many of its portfolio companies tend to have domestically focused supply chains, providing a degree of insulation from tariffs.

MiddleGround is also seeing opportunities in the industrials sector to do deals with corporate sellers, including carveouts and take-private deals.

Some of these opportunities stem from corporates that completed large acquisitions and are now looking to prune non-core assets in order to focus on core business areas, she added.

MiddleGround has also been active on the take-private front. To date, it has completed two take-privates, including a deal for Athol, Massachusetts-based manufacturer L.S. Starrett last year, also from Fund III.

Looking ahead, the sponsor intends to continue with this strategy.

“We’re looking for good businesses that are leaders in their space, but that we can optimize further,” said Paras. “That makes them more attractive to more buyers when they go to exit.”