The Deals Done and Not Done

August 25, 2020

GF Data’s just-released report for the second quarter of 2020 provides a clear view of the M&A marketplace in the months following the onset of Covid-19: Virtually no change in valuations, dramatically reduced volume and dramatically less debt usage.

The data tracking firm reported on transactions completed by 227 active private equity contributors in the quarter and meeting its parameters Total Enterprise Value (TEV) of $10 million to $250 million and TEV/Trailing Twelve Months (TTM) Adjusted EBITDA of 3x to 15x.

Valuations averaged 7.4x TTM Adjusted EBITDA in Q2, said Andrew Greenberg, the CEO of GF Data. This is unchanged from Q1. Yet there were only 31 completed deals in the GF Data universe, compared to about 80 in the prior quarter and the year-ago second quarter. Even allowing for late reporting in the latest period, the completed transaction activity was off from 50 to 60 percent.

The circumstances driving this downturn are of course unprecedented, added Mr. Greenberg. But one effect familiar from other down markets is the need to temper the data with a recognition of the deals that didn’t happen. It will take another two or three quarters for our overall view of the market to reflect other transactions that would have closed this spring had there not been this extraordinary public health event.

While valuations did not move in the second quarter, there was an immediate retrenchment in leverage. Total debt averaged 3.3x TTM Adjusted EBITDA for the quarter, said B. Graeme Frazier, IV, GF Data’s co-founder, and principal. This is a drop of more than half a turn from the range that prevailed from 2017 through the first quarter of this year.

Static deal pricing combined with reduced debt utilization translated into a spike in the average equity share required to get deals done noted Mr. Frazier. The average equity contribution for the quarter jumped about eight percentage points to 56.5%.

The vast majority of transactions closed in Q2 were likely already underway in one form or another prior to the pandemic taking hold, said Dan Gaspar, a partner at TZP Group, a New York-based multi-strategy private equity firm. We observed that most sale processes were halted in March and many did not reboot until June or July. The true impact of COVID-19 on the market will prove out over the remainder of the year.

We also observed that the leveraged lending markets experienced an immediate retrenchment in new deal issuances and leverage levels, combined with an increase in pricing that is likely to persist for some time, added Mr. Gaspar. Whether that reduction in debt availability will result in lower valuations or increased equity contributions will be case dependent.

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 227 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 drill-down reports; and (5) continuous access, through GF Data’s secure website, to detailed valuation data organized by NAICS code.

For information on subscribing or on contributing data as a private equity participant, please contact Bob Wegbreit at bw@gfdata.com or 610-616-4607.

Private Equity Professional | August 25, 2020