Honey, We Shrunk the Volume

Valuations and debt levels remained aloft in the second quarter of 2018, according to GF Data’s just-released August report.   At the same time, the data tracking firm saw a drop in completed deal volume that defies the general sense of an enduring red-hot market.

Two hundred and six private equity groups and other deal sponsors reported to GF Data® on 47 transactions completed in the $10 million to $250 million Total Enterprise Value (TEV) range, with valuations of 3x to 15x Trailing Twelve Months (TTM) Adjusted EBITDA.   This is a drop from 63 transactions completed in the first quarter and 57 transactions in the year-ago second quarter.

Valuations for the quarter overall averaged 7.4x which is in line with average marks in the “mid-sevens” attained since the middle of last year.

“Since we don’t see evidence that the market is slowing, we have an alternate theory,” said GF Data CEO Andrew Greenberg. “For deals closed in the second quarter, the center-of-gravity launch period would have been the fourth quarter of last year.   That was a point of accumulating uncertainty over trade policy, impending federal tax changes and broader market conditions.  That uncertainty may well have created a stutter step in properties coming to market then and in completed transactions now.  We continue to believe, however, that deal volume is showing no sign of abatement outside of this quarterly blip.”

According to Graeme Frazier, IV, GF Data’s Co-Founder and Principal, while headline valuations remain essentially unchanged, a drilldown into the aggregate data reveals more pronounced signs of a bifurcated market.   “The “size premium” we report on – the spread between average values at $10 million to $50 million and average values at $50 million to $250 million – is at 3.4x, a record high.  Similarly, the quality premium – the spread in favor of better financial performers against other businesses – is 26 percent, also a record.”

John Sinnenberg, Chairman of Cyprium Investment Partners, a private equity fund manager focused on making minority equity and junior capital investments, assessed current deal flow in the context of this recent completed activity. “While the idea of seasonal abnormalities are not exclusive to the last 12 months, we saw first-quarter deal launches delayed by three to four months as shareholders waited for a vote on tax reform and then processed its impact on their businesses,” said Mr. Sinnenberg. “Notwithstanding these delays, we have seen an increase in year-over-year deal flow and recognize the referenced data point as a short-term abnormality rather than an inflection point.”

GF Data provides reliable external information for use in valuing and assessing M&A transactions to private equity firms, investors, lenders and other users.  The firm collects and publishes proprietary transaction information from private equity groups on a blind and confidential basis.  The pool of active contributors comprises 206 private equity firms, mezzanine groups and other financial sponsors. Data contributors and other subscribers receive five 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; (4) quarterly industry drilldown reports; and (5) 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@gfdata.com or at 610-616-4607.

GF Data is based near Philadelphia in West Conshohocken, PA (www.gfdata.com).

© 2018 Private Equity Professional | August 21, 2018

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