Size Eclipses Performance in Private-Equity Deals

West Conshohocken, PA — Private equity investors in the middle market are paying significantly higher multiples to acquire larger firms, while the premium investors place on above-average financial performance is diminishing, GF Data reports.

GF Data’s 2011 year-end report includes valuation, volume, leverage and key deal-term data on 1,332 private equity backed transactions in the $10-250 million value range completed since 2003. The data reflects deal activity by 185 private equity firms, including 166 active contributors.

The “size premium” conferred on larger deals within this value range reached record levels in 2011. Firms valued in the $50 to 250 million range commanded an average multiple of 7.7x Total Enterprise Value (TEV) / Trailing Twelve Months (TTM) Adjusted EBITDA. Those valued at $10 to $50 million went for an average of 5.5x. This spread of 2.2x is substantially more than averages of .7x to 1.2x in the five prior years.

By contrast, the “quality premium” – which GF Data measures by highlighting above-average financial performers based on their revenue growth and EBITDA margins — fell from a traditional average of three percent to less than zero in 2011. In the larger $50 – $250 million TEV bracket, however, better performers still were accorded a premium in relation to other businesses.

“The tired cliche is proving out this year. Size does indeed matter. What we are seeing is that financial buyers will assign record value to a $100 million property in relation to a comparable $25 million business, that the scarcity of quality deals has eroded the differential between the ‘A’ and ‘B’ businesses at the lower-end of the middle market, and that a business benefitting from both size and quality performance still will be rewarded for both in the marketplace,” said Andrew T. Greenberg, GF Data’s CEO and co-founder.

The GF Data report also shows that total deal volume has continued to climb over the past three quarters, while still not at the levels reached in the second half of 2010. GF Data’s active contributors reported 44 qualifying transactions in Q4, bringing the total for the year to 145. In 2010, the figures for Q4 and the year were 64 and 169, respectively.

GF Data co-founder B. Graeme Frazier, IV said, “Our impression from discussions with our private equity contributors and subscribers is that the market was pausing to catch its breath a year ago after a feverish second half of 2010, but there is now much more momentum heading into this spring.”

Some private equity advisers in the mid- and higher markets see greater emphasis being placed on quality and performance in recent deals, Andy Chidester, managing director of Amherst Partners in Chicago, reports. “On the bigger deals, we have seen a continued ‘flight to quality’ by private equity firms in recent months – quality industry, quality customer end markets, quality financial performance – but this phenomenon is particularly evident in the larger lower-middle market deals. Even distressed private equity firms are sincerely pursuing higher quality businesses than in the past, as long as they are at least of a critical mass,” Chidester said.

Other highlights from the current GF Data report, which is available to subscribers, include:

  • Aggregate deal valuations in 2011 were 6.1x, up from an average of 5.9x in 2010.
  • Total and senior debt multiples finally reflected the general sense of loosening, reaching averages in the mid-threes and mid-twos, respectively, after remaining in the low threes and low twos for the prior five quarters.
  • Equity as a share of average capital structure fell to 48.2% in 2011 — down slightly from levels above 50% in 2009 and 2010 — caused by the rise in available leverage as valuations held steady.
  • Due to the competitive lending environment, initial senior-debt borrowing costs did not increase in step with rises in the 90-day LIBOR rate. Spreads dropped from LIBOR plus 5.65% in Q2 to LIBOR plus 4.1% in Q4.

About GF Data Resources LLC

GF Data Resources LLC provides data on private equity sponsored M&A transactions with enterprise values of $10 to $250 million, offering private equity firms and other users reliable external information to use in valuing and assessing M&A transactions.

GF Data collects transaction information from private equity groups on a blind and confidential basis. Information has been provided by 185 private equity firms on the deals included in the latest report.

Data contributors and paid subscribers receive two products — high-level valuation and leverage data in these electronically delivered quarterly reports, and continuous access through the web site to detailed valuation data organized by NAICS industry code.

For information on subscribing or on contributing data as a private equity participant, contact GF Data at www.gfdataresources.com.

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