In the first quarter of 2022, the big story in the middle market wasn’t what financial buyers were paying but rather what transactions were getting done. According to GF Data’s May report, valuations for private equity-backed middle-market transactions held steady at an average of 7.3 times EBITDA.
GF Data’s 253 active private equity contributors reported on 56 transactions in the quarter meeting our standard parameters — Total Enterprise Value (TEV) of $10 million to $250 million and TEV/Trailing Twelve Months (TTM) Adjusted EBITDA of 3x to 18x. GF Data will be expanding its analysis to transactions with TEV of as much as $500 million and will be adding coverage of these transactions going forward.
The first quarter saw a host of challenging factors—including Russia’s war in Ukraine, a surge in commodities prices, a significant interest rate increase and ongoing supply-chain issues—that appear likely to impact the transaction environment over the next few quarters.
“The 7.3x mark for Q1 was on par with all of 2021, but down from 7.5x in the second half of last year,” said Andrew Greenberg, a co-founder of GF Data. “Time will tell whether this was an inconsequential dip or early signs of a softening market.”
The first quarter also continued a trend of an unusually high percentage of transactions meeting the standards for “above-average” financial performance underlying the calculation of a “quality premium.” The selling businesses designated as above-average based on TTM EBITDA margin and revenue growth reached 67% of the total transaction volume in Q1 (compared to 66% in the fourth quarter).
“The percentage of above-average transactions for the quarter tells the story,” said Bob Dunn, GF Data’s managing director. “And it’s about private equity being selective – focusing on the strongest targets to the exclusion of the average.”
Meanwhile, debt utilization dropped by three-tenths of a turn, with average senior and total debt at 3.2x and 3.9x in the quarter, down from 3.3x and 4.0x, respectively, against the 2021 figures. If this trend continues, we will look back on these figures as early evidence that rising interest rates have begun to outweigh the volume of dry powder to support private equity-backed transactions.
“While it will definitely be interesting to see the resiliency of the transaction economy through the summer months and the balance of 2022, the beauty of the lower-middle market is that there will always be founder and family-owned businesses with a better approach to market and able to outperform even during challenging times,” said David Gershman, the chairman of ACG board and a partner at Trivest. “Those great businesses will continue to transact with willing buyers and sellers.”
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. GF Data is owned by the Association for Corporate Growth.
© 2022 Private Equity Professional | May 26, 2022
