The acceleration in middle-market private equity deal volume seen during the last half of 2011 and the first quarter of 2012 has stalled out somewhat in the second quarter of 2012, according to the latest report from GF Data. “Despite an unprecedented availability of capital, improved corporate performance in many sectors and anticipated increases in federal tax rates in 2013, completed deal volume in the second quarter was less than expected,” said Andrew Greenberg, GF Data’s CEO and co-founder.
“The lenders, deal principals and investors we speak with had predicted a continued acceleration in deal activity. Many now attribute the apparently diminished seller enthusiasm to some combination of uncertainty over the macroeconomic picture and concern about the limited returns currently available, based on recent stock and bond market performance, for the reinvestment of deal proceeds,” said Mr. Greenberg. “While for many businesses and in many industries, this remains a great time to sell, this is not the first time we have seen private business owners respond to risk as ‘reverse diversifiers’ and remain concentrated in what they know best.”
Not all brackets in the middle market experienced a slowdown in completed deals, however. “Our monthly deal flow of lower-middle-market sponsored-backed transactions has remained stable, but the quality of flow has been mixed all year with more companies being marketed with inconsistent financial performance, lower EBITDA margins and higher customer concentrations than we would like,” said Tim Clifford, Founder and CEO of Abacus Finance in New York. “From a liquidity perspective, there is no shortage of competition, with many firms that have traditionally focused on larger EBITDA-sized companies coming down to our market, which has driven up leverage, forcing more aggressive terms , including amortization and price.”
The 30 deals reported by GF Data contributors show that the trend toward higher premiums paid for larger companies continues. Throughout the first half of 2012, companies in the $50 million to $250 million valuation range commanded prices, on average, of 6.9 times trailing twelve months (TTM) adjusted EBITDA, compared to 5.6 times TTM for companies in the $10 million to $50 million range.
Quality, as evidenced by above-average financial performance based on revenue growth and EBITDA margins, also continued to command a premium. Businesses with above-average financial characteristics sold for an average five percent premium over other companies. The health-care services sector continued to shine, posting average multiples of 7.9 times TTM EBITDA.
Aggregate total and senior debt levels have remained essentially unchanged since the first quarter, according to B. Graeme Frazier, GF Data’s principal and co-founder. “Larger middle-market deals are benefitting from two dynamics pushing their valuations in relation to the pricing on smaller deals. Leverage multiples are higher on the larger transactions, and private equity buyers are prepared to stretch more in the equity they provide,” said Mr. Frazier. For the second quarter, equity was 47 percent of the average deal structure in the $10 million to $50 million bracket and 53 percent in the $50 million to $250 million range.
GF Data Resources provides data on private equity sponsored M&A transactions with enterprise values of $10 million to $250 million, offering private equity firms and other users external information to use in valuing and assessing M&A transactions. GF Data collects transaction information from private equity groups on a blind and confidential basis. Data contributors and paid subscribers receive two products ‐‐ high‐level valuation and leverage data via electronically delivered quarterly reports, and continuous access through the firm’s web site to detailed valuation data organized by NAICS industry code. For information on subscribing or to contribute data as a private equity participant, contact GF Data at www.gfdataresources.com.