In the Thermocline

February 26, 2020

By Andy Greenberg
CEO GF Data® and Greenberg Variations Capital

In its just-released February report, GF Data turned to an oceanographic term to describe the state of the middle market, noting that all of the action is in the “thermocline” — the layer in deep water subject to significant temperature change even when the surface temperature is changing hardly at all.

“Completed deal activity in the fourth quarter of 2019 reflected the same conditions that have been prevailing for the past several years,” said Andrew Greenberg, CEO of GF Data. “Valuations overall averaged 7.2x trailing twelve months adjusted EBITDA for the year — unchanged from a year ago. The average total debt edged up, from 3.8x to 4.0x.”

“While the headline numbers didn’t move much, they once again point to the central role debt providers have played in prolonging this seller’s market,” added Mr. Greenberg. “In 2018, buyers were making an unprecedented average equity contribution of about 54 percent. That number eased to 51 percent in 2019, a measure of relief that may well further sustain current conditions.”

The overall stability in valuations and debt loads does not mean every business is being valued and financed as it would have been 18 months ago. According to GF Data’s report, sub-surface complexities abound.

“Larger businesses and those in desirable sectors still are being acquired at lofty multiples with strong debt support, said B. Graeme Frazier, IV, GF Data’s Co-Founder and Principal. “In the $100 million to $250 million valuation tier, valuations averaged 9.7x for the year.”

“At the same time,” added Mr. Frazier, “smaller, lower growth and more cyclical companies are being acquired by buyers choosing more conservative capital structures. The percentage of deals being completed with less than the maximum available leverage has risen steadily from 42.6 percent in 2016 to 49.8 percent last year.”

“We have been able to close two platform investments in the last few months and are finding it is more important than ever to differentiate ourselves in this crowded market,” said Lauren Mulholland, a partner at MiddleGround Capital. “We are seeing more targeted processes from bankers and are focused on increased flexibility with our lending partners given peak cycle concerns.

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About the Author

Andy Greenberg is CEO of GF Data® and of Greenberg Variations Capital, a mergers & acquisitions advisory firm devoted to one-off or targeted transactions. GF Data is the leading provider of valuation, volume, leverage and key deal term information on private transactions in the $10 to $250 million value range. GF Data and GVC are both based in suburban Philadelphia. All charts and data are subject to the terms of use of the sources cited in this commentary.


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