“Risk Off” is the name of the game for mid-market private equity professionals, according to GF Data’s November report. The third quarter saw a marked surge in valuations accompanied by substantial increases in equity contributions and cost of capital due to a slowing economy and successive interest-rate increases.
GF Data’s 266 active private equity contributors reported on 66 transactions in the third quarter meeting our parameters—Total Enterprise Value (TEV) from $10 million to $250 million and TEV/Trailing Twelve Months (TTM) Adjusted EBITDA from 3x to 18x. Completed volume was about 28% off the 78 deals closed in the year-ago third quarter.
Valuations on transactions completed in the third quarter averaged 8.1x Trailing Twelve Months (TTM) Adjusted EBITDA. When looking only at the buyout cohort year-over-year, GF Data found valuations rose to 7.5x in 2022 year to date, against 7.4x for all of 2021.
“While the spike is directionally correct, we believe it is overstated,” said Andrew Greenberg, the founder of GF Data. “The random fall of highly valued deals by quarter and a preponderance of non-buyout transactions – such as growth capital investments and recapitalizations – completed at lofty multiples in the period pushed up the average.
“Over the balance of the year, we expect the market to be characterized less by a small cohort of highly valued deals and more by sellers absorbing the effects of more challenging economic and capital market conditions,” added Mr. Greenberg.
Average equity contributions surged across the entire data set – to 51.4 percent in the first nine months of the year versus an average of 48.2 percent for all of 2021—while the average for platform buyout transactions jumped 2.5 percentage points, to 57 percent versus 54.5 percent. Initial pricing on senior debt averaged 6.5 percent in the third quarter, up nearly 200 basis points from the first half of the year. Mezzanine pricing has so far resisted a similar move.
Despite this trend, GF Data’s November report found average debt loads essentially unchanged. “We hear the reports of a risk-off market for cash flow-based leveraged finance,” said Bob Dunn, the managing director of GF Data. “But through the summer quarter, this was not yet reflected in the numbers.”
“We are seeing a decline in both valuations and leverage for those companies considered cyclical and vulnerable during an economic downturn,” said Michael Carter, a managing partner of Carter, Morse & Goodrich, a Connecticut-headquartered investment bank. “On the supply side, we expect transactions to shift from private equity sellers to founder-led and family-held companies that are more driven by personal and strategic objectives rather than valuations.”
Founded in 2006, GF Data provides data on private equity-sponsored M&A transactions with enterprise values between $10 million and $500 million. The firm’s benchmark reports comprise proprietary transactional information provided by an established pool of private equity groups on a blind and confidential basis. GF Data’s subscribers utilize its accurate and up-to-date reports to value and assess middle-market businesses.
© 2022 Private Equity Professional | November 18, 2022
