by Andy Greenberg, CEO GF Data
: published PEP Digest — Third-quarter middle-market private equity deal multiples indicate buyers are willing to pay a premium for still-scarce quality businesses, according to GF Data’s third-quarter report. “For the past quarter, buyers paid 6.9 times the average trailing-twelve-months adjusted EBITDA,” said Andrew Greenberg, GF Data’s CEO and co-founder. “Looking at the full year smoothes out the spike, but the trend is still unmistakable – valuation multiples in the $10 million $250 million Total Enterprise Value (TEV) range have been 6.4 times in the year to date, compared to 6.1 times in 2011.”
While larger transactions within the GF Data universe continue to be more highly valued than smaller ones, it was the lower end of the universe that drove the surge in averages. The average in the $10 million to $25 million TEV bracket jumped from 5.4x in the second quarter to 6.3x in the third quarter. Average values in the $100 million to $250 million tier remained at 8.0x.
According to Mr. Greenberg completed deal volume continued to be moderate. The 172 private equity firms that are contributors to GF Data reported 32 completed transactions in the third quarter, virtually unchanged from 33 in the second quarter. This is well off the average of 50-plus reached in the fourth quarter of 2011 and in the first quarter of 2012. This volume also fell short of the expectations many private business buyers and deal professionals had of a busy year fueled by economic improvement, abundant capital to be invested and the prospect of higher tax rates.
The GF Data report also notes wide differences in debt availability by deal size as a phenomenon paralleling – and contributing to – differentials in valuation. Total debt to EBITDA multiples for the first nine months of 2012 range from about three times at $10 million to $25 million TEV to the mid-fours at $100 million to $250 million.
GF Data’s subscribers will also note nuances in the capital structures buyers are utilizing to complete larger and smaller transactions. Equity as a percentage of capital structure rises in the $50 million to $100 million tier, as buyers stretch to accommodate seller expectations, but then recede once again at $100 million as that impetus to stretch is accompanied by greater availability of debt.
“Buyers and intermediaries report that the scarcity of deals affected higher values for the lowest-middle-market,” said GF Data co-founder B. Graeme Frazier. “We’ve heard that individual and entrepreneurial owners of smaller businesses are anxious about the economy and reinvestment options and are consequently less likely than institutional sellers to make concessions on purchase price. As the credit cycle continues to expand available debt capital and in turn bolster valuations, we expect to see an increase in the volume of deals closed in the fourth quarter of 2012.”
Many feel that rises in valuations and multiples will continue in the fourth quarter. Thomas Tullidge, Jr., founding partner of Cary Street Partners, a Richmond, VA-based investment bank, said “Valuations for quality companies will remain strong in the near term. We are seeing a broad range of market participants actively pursuing interesting opportunities. Private equity buyers still have abundant capital to deploy with strong support from banks who need quality loans to offset overall soft loan demand and strategic buyers faced with slower growth in their core businesses are looking at M&A transactions to help drive earnings per share.”
GF Data Resources provides data on private equity sponsored M&A transactions with enterprise values of $10 million to $250 million, offering private equity firms and other users 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. Data contributors and paid subscribers receive two products high level valuation and leverage data via electronically delivered quarterly reports, and continuous access through the firm’s web site to detailed valuation data organized by NAICS industry code. GF Data is based in West Conshohocken, PA. For information on subscribing or to contribute data as a private equity participant, contact GF Data.
(c) 2012 PEPD * Private Equity’s Leading News Magazine * 11-19-12