Archives for November 2012

Third-quarter middle-market private equity deal multiples indicate buyers are willing to pay a premium for still-scarce quality businesses, according to GF Data’s third-quarter report.  “For the past quarter, buyers paid 6.9 times the average trailing-twelve-months adjusted EBITDA,” said Andrew Greenberg, GF Data’s CEO and co-founder. “Looking at the full year smoothes out the spike, but the trend is still unmistakable – valuation multiples in the $10 million $250 million Total Enterprise Value (TEV) range have been 6.4 times in the year to date, compared to 6.1 times in 2011.”

While larger transactions within the GF Data universe continue to be more highly valued than smaller ones, it was the lower end of the universe that drove the surge in averages.  The average in the $10 million to $25 million TEV bracket jumped from 5.4x in the second quarter to 6.3x in the third quarter. Average values in the $100 million to $250 million tier remained at 8.0x.

According to Mr. Greenberg completed deal volume continued to be moderate.  The 172 private equity firms that are contributors to GF Data reported 32 completed transactions in the third quarter, virtually unchanged from 33 in the second quarter.  This is well off the average of 50-plus reached in the fourth quarter of 2011 and in the first quarter of 2012.   This volume also fell short of the expectations many private business buyers and deal professionals had of a busy year fueled by economic improvement, abundant capital to be invested and the prospect of higher tax rates.

The GF Data report also notes wide differences in debt availability by deal size as a phenomenon paralleling – and contributing to – differentials in valuation.  Total debt to EBITDA multiples for the first nine months of 2012 range from about three times at $10 million to $25 million TEV to the mid-fours at $100 million to $250 million.

GF Data’s subscribers will also note nuances in the capital structures buyers are utilizing to complete larger and smaller transactions.  Equity as a percentage of capital structure rises in the $50 million to $100 million tier, as buyers stretch to accommodate seller expectations, but then recede once again at $100 million as that impetus to stretch is accompanied by greater availability of debt.

“Buyers and intermediaries report that the scarcity of deals affected higher values for the lowest-middle-market,” said GF Data co-founder B. Graeme Frazier. “We’ve heard that individual and entrepreneurial owners of smaller businesses are anxious about the economy and reinvestment options and are consequently less likely than institutional sellers to make concessions on purchase price.  As the credit cycle continues to expand available debt capital and in turn bolster valuations, we expect to see an increase in the volume of deals closed in the fourth quarter of 2012.”

Many feel that rises in valuations and multiples will continue in the fourth quarter. Thomas Tullidge, Jr., founding partner of Cary Street Partners, a Richmond, VA-based investment bank, said “Valuations for quality companies will remain strong in the near term. We are seeing a broad range of market participants actively pursuing interesting opportunities. Private equity buyers still have abundant capital to deploy with strong support from banks who need quality loans to offset overall soft loan demand and strategic buyers faced with slower growth in their core businesses are looking at M&A transactions to help drive earnings per share.”

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.  GF Data is based in West Conshohocken, PA.  For information on subscribing or to contribute data as a private equity participant, contact GF Data at www.gfdataresources.com.

© 2012 PEPD • Private Equity’s Leading News Magazine • 11-19-12

Returns for U.S.-based private equity and venture capital funds were essentially flat for the quarter ending June 30, 2012; the performance of both alternative asset classes was down sharply from the prior quarter. However, private equity and venture capital funds outperformed U.S. public equity markets during the second quarter. Venture capital fund returns slightly bested those for private equity for the period, according to a new commentary from Cambridge Associates.

The Cambridge Associates U.S. Private Equity Index returned negative 0.1% for the second quarter, a 5.5% drop from the prior quarter. For comparison, the S&P 500 returned negative 2.8% for the period, a fall of 15.4% from the first quarter. The Cambridge Associates U.S. Venture Capital Index® was off 4.1% from its first quarter performance, returning just 0.6% for the second period. The Russell 2000, the small company index, returned negative 3.5%, putting it 15.9% below its performance in the first quarter.  

(Click image to enlarge)

As the table above indicates, for the first six months of 2012 the private equity and venture capital benchmarks performed almost identically, earning 5.5% and 5.4%, respectively. Both trailed public equities for the period. Over the three longest time horizons in the table — the 15-, 20-, and 25-year marks — the reverse was true, with both benchmarks significantly outperforming comparable public market indices.

Funds Raised in 2008 had the Highest Return among the PE Index’s Largest Vintage Years.

Three of the five largest vintage years by weight in the private equity index generated positive returns for the second quarter, including the two largest, 2007 and 2006. Together, these two vintages represented 47% of the index’s value; they earned 0.6% and 0.9%, respectively. The best performing vintage year of the top five, 2008, earned 1.6%, while the worst, the 2004 funds, lost 3.4% for the period.

The 2004 funds’ relatively poor performance was driven primarily by decreased valuations in information technology (IT) companies. IT losses also impacted the 2008 funds, but these were offset by valuation gains in hardware, healthcare, and manufacturing companies.

In the PE Index, Capital Calls were Down while Distributions were Up

During the second quarter fund managers in the private equity index asked for the lowest level of contributions from their limited partners in the past three years: $11.3 billion, an almost 17% decrease from the prior period. At the same time, capital distributions jumped almost 73% from the first quarter, to $28.7 billion, the second largest quarterly distribution in the last five years.

“This was the fifth time in the last seven quarters that fund managers in the PE index returned more capital to their limited partners than they collected through contributions. And the scale of the difference was, historically, striking, in that it was the first quarter in the past 20 years that fund managers in the index distributed more than 2.5 times the amount that they called,” said Keirsten Lawton, Senior Consultant, Private Equity Research at Cambridge Associates. “The second quarter also marked the sixth quarter in a row in which the 2007 funds, the largest vintage in the index, called the most capital — they are now about 70% drawn. The largest distribution came from the 2006 funds, whose managers returned 5% of contributed capital to their investors.”

Software was the Best Performing Sector, IT was the Worst

Three of the eight sectors representing at least 5% of the PE index’s value earned positive returns for the quarter. Software led the way, earning 7.4%, followed by healthcare’s 2.6% and consumer’s 1.5%. IT was the worst performer, returning negative 4.1%. The three largest sectors in the index — consumer, energy, and healthcare — represented more than 50% of the index’s value and returned 0.2% on a dollar-weighted basis for the quarter.

Software was also the best performing of the four largest sectors in the VC index, where it generated a second-quarter return of 6.9%. Because software represented a larger percentage weight in the VC index than the PE index (17.5% vs. 7.4%), its strong performance had a bigger impact in helping to keep the VC index’s return in positive territory.

“The only significantly-sized sector that had a loss for the quarter in the VC index was IT, which dropped almost two percent. Since IT was also the largest sector in the index, representing just over one-third of its value, it was the largest drag on the index’s performance during the period, and offset positive returns in the software, healthcare and media sectors,” said Peter Mooradian, Managing Director and Venture Capital Research Consultant at Cambridge Associates.

A copy of Cambridge Associates’ commentary on the second-quarter performance of its U.S. private equity and venture capital benchmarks is available by clicking HERE.

© 2012 PEPD • Private Equity’s Leading News Magazine • 11-14-12