August 18, 2019
The protracted strong market for business sellers continues to be a party that shows no sign of winding down, according to GF Data’s report on private equity deal activity in the second quarter.
Two hundred private equity sponsors and other acquirers reported to the data tracking firm on 51 transactions completed in the $10 million to $250 million Total Enterprise Value (TEV) range. Valuations for the quarter averaged 7.6x Trailing Twelve Months (TTM) Adjusted EBITDA. Debt utilization continued to both reflect and buoy strong valuations. Total Debt/EBITDA for the quarter averaged 4.2x, close to the quarterly high-water mark.
“While there is some fluctuation from quarter to quarter,” said GF Data’s CEO Andrew Greenberg, “valuations have remained stable on a fairly elevated plateau. When we look at rolling two-quarter averages, the overall pricing multiple has hovered between 7.1x and 7.5x over the past six quarters. Two caveats should apply. Valuations continue to be more robust on larger transactions and in some business categories, and the second quarter data obviously doesn’t reflect more recent market gyrations. By next quarter, we’ll see whether the bond market’s rate inversion was hiccup or harbinger.”
According to the firm’s report, the accommodating debt market appears to be playing an indispensable role in prolonging current conditions. “Debt utilization has enabled financial buyers to get some relief in capital structure, even as they maintain deal pricing,” said B. Graeme Frazier, IV, GF Data’s co-founder and principal. “The rolling two-quarter data shows average equity contribution receding to 47% after peaking at 54% in the second half of 2018.”
While debt usage overall remains aggressive, Mr. Frazier observed that an increasing share of business buyers are opting for more conservative capital structures. “Acquirers utilizing leverage report to us on the extent of debt they employed. The percentage of deals completed with debt “at or close to the maximum level available” peaked at 43% in 2016. That figure had dropped to 35% in 2018 before ticking up to 37% in this year to date.”
Tim Clifford, the president and CEO of Abacus Finance, an active lender to the lower middle-market, provided this comment on the overall environment for deal activity. “The lower middle-market will be somewhat protected, but not immune to weaker deal activity during softer economic times — across all economic cycles entrepreneurs experience life events that lead to transactions. As market volatility rises resulting from concerns of rates, tariffs, and a looming recession, the importance of flexibility in the capital structure becomes paramount in helping support these businesses during a downturn.”
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 200 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.
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