Debt in the Driver’s Seat
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Debt in the Driver’s Seat

gf data nf3While middle-market valuation multiples are near or at historic highs, according to GF Data’s third-quarter report, the current environment is set apart by the origin of the frothiness.  “In the twelve-year history of our data base,” said GF Data CEO Andrew Greenberg, “We’ve never seen a market in which equity values have been driven by debt values as much as is the case right now.”

andrew greenberg nf6GF Data’s 193 active private equity data contributors reported 36 completed transactions in 3Q within the $10 million to $250 million Total Enterprise Value (TEV) range, about in line with the activity levels seen in the first half of the year.  Valuations averaged 6.7x Trailing Twelve Months (TTM) Adjusted EBITDA across the GF Data sample.  According to Mr. Greenberg the premiums for larger size and for better performing businesses have never been greater.  “There is also an interesting crosscut effect,” he said.  “Larger businesses are being valued more highly than smaller ones, but the spread is reduced when the smaller firms are offering above-average financial characteristics and management continuity to the buyer post-close.”

Debt availability appears to be both driving and reflecting the heightened interest in larger middle-market properties.  Year to date the average equity contribution in 2014 has been about 47 percent in the $50 million to $100 million TEV range compared to 41 percent at $10 million to $25 million TEV and 44 percent at $100 million to $250 million.

graeme frazier nf6“The result is a somewhat hump-shaped curve in terms of equity contribution,” said B. Graeme Frazier, IV, GF Data Co-Founder and Principal.  “Buyers in the middle of our size range – say the $50 million to $100 million deals – are needing to put in more equity because they don’t get either the benefit of more restrained valuations at the low end or greater debt support on the larger transactions.”

Given this unprecedented level of debt support, “there are more buyers now than at any point since the end of the last recession”, according to Tim Troha of KPMG Corporate Finance. “In the oil and gas industry, for example, we find that despite the 30 percent decline in the price of oil, there are still many confident buyers at the table.”

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 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 to GF Data or to contribute data as a private equity participant, contact Bob Wegbreit at bw@gfdataresources.com or visit the firm’s website at www.gfdataresources.com. GF Data is based near Philadelphia in West Conshohocken, PA.

© 2014 PEPD • Private Equity’s Leading News Magazine • 11-19-14

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