The brisk acceleration in middle-market private equity deal volume seen in the last half of 2011 and the first quarter in 2012 stalled out somewhat in the second quarter of 2012, according to GF Data’s second-quarter report.
"Despite an unprecedented availability of capital, improved corporate performance in many sectors and anticipated increases in federal tax rates in 2013, completed deal volume in 2Q was less than expected," says Andrew T. Greenberg, GF Data’s chief executive and co-founder.
GF Data issues detailed reports, available to subscribers, on M&A transactions in the USD10m to USD250m value range completed by middle-market private equity firms. One hundred and sixty-nine contributing PE firms reported 30 completed deals in the second quarter of 2012, well off the average of 45 deals reported in each of the preceding three quarters.
"The lenders, deal principals and investors we speak with had predicted a continued acceleration in deal activity. Many now attribute the apparently diminished seller enthusiasm to some combination of uncertainty over the macroeconomic picture and concern about the limited returns currently available, based on recent stock and bond market performance, for the reinvestment of deal proceeds," Greenberg says. "While for many businesses and in many industries, this remains a great time to sell, this is not the first time we have seen private business owners respond to risk as ‘reverse diversifiers’ and remain concentrated in what they know best."
Not all brackets in the middle market experienced a slowdown in completed deals, however.
"Our monthly deal flow of lower-middle-market sponsored-backed transactions has remained stable, but the quality of flow has been mixed all year with more companies being marketed with inconsistent financial performance, lower EBITDA margins and higher customer concentrations than we would like. From a liquidity perspective, there is no shortage of competition, with many firms that have traditionally focused on larger EBITDA-sized companies coming down to our market, which has driven up leverage, forcing more aggressive terms, including amortization and price," says Tim Clifford, founder and chief executive of Abacus Finance in New York.
The 30 deals reported by GF Data contributors show that the trend toward higher premiums paid for larger companies continues. Throughout the first half of 2012, companies in the USD50m to USD250m valuation range commanded prices, on average, of 6.9 times trailing twelve months (TTM) adjusted EBITDA, compared to 5.6 times TTM for companies in the USD10m to USD50m range.
Quality, as evidenced by above-average financial performance based on revenue growth and EBITDA margins, also continued to command a premium. Businesses with above-average financial characteristics sold for an average five percent premium over other firms. The healthcare services sector continued to shine, posting average multiples of 7.9 times TTM EBITDA.
Aggregate total and senior debt levels have remained essentially unchanged since 1Q, according to B. Graeme Frazier, IV, GF Data’s principal and co-founder. While leverage multiples are disclosed only to subscribers and contributors, Frazier says the data tracks – and highlights – the disparity in valuation by deal size.
"Larger middle-market deals are benefiting from two dynamics pushing their valuations in relation to the pricing on smaller deals. Leverage multiples are higher on the larger transactions, and private equity buyers are prepared to stretch more in the equity they provide," Frazier says.
For 2Q, equity was 47 per cent of the average deal structure in the USD10m to USD50m bracket and 53 per cent in the USD50m to USD250m range.