The fourth quarter of 2014 featured continued gains in completed transaction volume, according to GF Data’s year-end report, but also reported an overall valuation mark running counter to the general impression that deal pricing is only being pushed upward in a sellers’ market.
GF Data’s 194 active private equity contributors reported 51 deals completed in the fourth quarter with total enterprise values between $10 and $250 million. Valuations averaged 6.1x for the quarter, compared to an average of 6.6x in the first nine months of the year.
“For some time,” said GF Data CEO Andrew Greenberg, “We’ve observed that the private middle market M&A activity is ‘all push and no pull.’ That is, many would-be business sellers had been lulled into believing that the favorable environment was not going to go away anytime soon. They resisted being pulled into the market by macro conditions, and instead waited until their individualized circumstances made them ready to sell.”
“We think the fourth quarter may be showing the early signs of a market that finally has some pull to it,” continued Mr. Greenberg. “It stands to reason that smaller and less strong businesses will move first as owners recognize that their valuations will never be higher. In fact, these firms are the ones that pulled down the average in the fourth quarter. The valuations for larger, better performers remained in the range of 8x EBITDA.”
Debt support for larger deals remains a key dynamic, according to B. Graeme Frazier, IV, GF Data’s Co-Founder and Principal. “Platform valuations in the $100 million to $250 million value range traded at an average of 7.4x – two full turns more than the 5.4x average at $10 million to $25 million. But greater utilization of debt (4.2x total debt compared to 2.9x) paid for two thirds of that differential.”
According to Andrew Petryk, Managing Director and Principal at Brown Gibbons Lang & Co., “It remains a sellers’ market, the deal window is open and sellers are benefitting from strong valuations and deal terms across industry sectors. Both private equity and strategic buyers have plenty of capital and lenders are supporting transaction with aggressive debt packages.”
“We are arguably seven to eight years into the current cycle,” added Mr. Petryk. “Owners of businesses that are not contemplating a sale in today’s environment either have a long term investment horizon or are comfortable with outsized operating and capital markets risk. At some point, growth will slow, interest rates will climb, and the capital markets will become more conservative. The question is when?”
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 194 private equity firms, mezzanine groups and other financial sponsors.
Data contributors and other 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. GF Data is based in West Conshohocken, PA (www.gfdataresources.com).
© 2015 PEPD • Private Equity’s Leading News Magazine • 2-17-15