Middle-market deal activity has perhaps never before conformed so clearly to anecdotal impressions of what the market is valuing, according to GF Data’s second quarter report. At the same time, the data tracking firm’s principals see signs of shifts in capital structure that may presage the current “seller’s market” become a little less of one.
GF Data’s 199 active private equity data contributors completed 49 deals in the $10-250 million Total Enterprise Value (TEV) range in the first quarter of 2015, at an average valuation of 6.5x Trailing Twelve Months (TTM) Adjusted EBITDA.
“The so-called ‘size premium’ – the reward given to larger businesses over comparable smaller ones -remains high,” said GF Data CEO Andrew Greenberg. “But what stands out in this report is three other factors with a lot of force as drivers of value – institutional as opposed to individual/family ownership prior to sale, above-average financial characteristics and continuation of management post-close. For all buyouts, the average valuation in the first six months of the year was 6.7x. Each of those three factors led to some pop in the multiple, but selling businesses offering all three were rewarded with an average mark of 8.4x.”
With the 49 reported transactions in Q1, completed transaction volume in the first six months of this year was up modestly over the year-ago period – 103 transactions to 94. The data through the second quarter also suggests that the market has crested in terms of the equity contribution required of
financial acquirers. According to B. Graeme Frazier, IV, GF Data’s Co-Founder and Principal, “Average equity share has continued to decline from nearly 50 percent in 2013 to 43.0% in the first half of 2015. We think this is the inevitable by-product of an environment in which valuations have firmed up slightly while debt utilization has increased more markedly.”
“We are hearing from many buyers and deal professionals that the debt markets have begun to tighten up,” continued Mr. Frazier. “If this is in fact the case, we may see the combination of retrenchment in equity and in debt leading to some retrenchment in valuation.”
According to Wil Becker, Managing Director at Chartwell Financial Advisory, a Minneapolis-based financial advisor and investment bank, “The M&A market did continue its robust pace through the second quarter of 2015 and the trend appears to be continuing with the favorable interest rate environment. However, we are starting to see multiples level off and even retreat a bit. If interest rates rise and credit terms tighten, we may see further multiple contraction.”
GF Data provides reliable 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 199 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 on 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 bw@gfdataresources.com or 610-260-6263. GF Data is based in West Conshohocken, PA (www.gfdataresources.com).
© 2015 PEPD • Private Equity’s Leading News Magazine • 8-17-15
