By Andy Greenberg, CEO GF Data
Valuation multiples in the GF Data M&A universe of M&A transactions were largely unchanged in the first few months of this year – 6.4 times Trailing Twelve Months (TTM) Adjusted EBITDA compared to 6.5 times in 2013 – but that constancy obscures – as Paul Harvey would say, “the REST of the story.”
Within GF Data’s Total Enterprise Value (TEV) parameters of $10 to $250 million, the premiums buyers are applying to selling businesses offering greater size and better financial performance have never been higher.
Businesses in the $50-$250 million swath of the market traded at an average of 8.8x in 1Q, compared to 5.1x on deals in the $10-$50 million bracket. This 3.7x spread dwarfs the historical average of 1.3x and was propelled in part by the most pronounced differentials in debt levels seen in a transaction universe that dates back to 2003.
The premium for above-average financial performance – defined roughly as TTM EBITDA margins and revenue growth in excess of 10 percent – was 20 percent for 1Q. This is in line with the 2013 mark of 18 percent. However, the average “quality premium” over the past 11 years is four percent.
“We’d expect the magnitude of these spreads to revert a bit to the mean over the course of this year,” said Andrew Greenberg, GF Data’s CEO, “but the directional message is unmistakable. The market has never been more bifurcated, and never hungrier for quality properties of a certain size.”
With respect to deal volume, the 188 private equity firms that are active contributors to GF Data reported 30 completed transactions in 1Q 2014, up from 24 in the year-ago quarter but markedly down from the 57 deals reported in 4Q.
“In the past, we’ve noted that the drop off in completed deal activity from the fourth quarter of one year to the first quarter of the next generally averages about 25 percent, with last year’s standstill following the 2012 year-end rush of course a major exception. That benchmark would point to 42 completed deals, not 30. Financial buyers and deal professionals clearly expected more carry over momentum from the 2013 year-end,” said B. Graeme Frazier, IV, GF Data Co-Founder and Principal.
“Debt markets are clearly continuing to support healthy valuation multiples, particularly in transactions valued over $50 million,” said Phil Gilbert, Managing Director of investment banking firm PMCF. “While the number of reported transactions in the first quarter is a bit lower than most expected, we’ve seen the number of private equity firms competing aggressively on value with strategic buyers increase substantially this year. Much of this can be attributable to the availability of low-cost debt capital.”
GF Data provides external information for use in valuing and assessing M&A transactions to private equity firms, investors, lenders and other users. GF Data collects and publishes proprietary transaction information from private equity groups on a blind and confidential basis. The pool of active contributors comprises 188 private equity firms, mezzanine groups and other financial sponsors. Data contributors and paid subscribers receive four products: (1) a quarterly report containing high-level valuation, volume and leverage data; (2) a quarterly supplement offering detailed information on debt and capital structure trends; (3) a semi-annual supplement o indemnification cap, escrow and other details; and (4) continuous access, through GF Data’s secure website, to detailed valuation data organized by NAICS code.
For information on subscribing or on contributing data as a private equity participant, please contact Bob Wegbreit at email@example.com or 610-260-6263.
© 2014 PEPD • Private Equity’s Leading News Magazine • 5-20-14