February 2010 | Issue 44
Although middle market deal volume declined substantially in 2009, valuations held relatively steady. This, according to GF Data Resources, producers of a proprietary database that provides detailed data on middle market private equity transactions (those with a purchase price of between $10 million and $250 million).
For the year 2009, GF’s data contributors reported a total of 65 middle market transactions, down by almost half from a total of 124 in 2008. There’s some sign that transaction activity is recovering, however. There was a pickup in the number of transactions in the fourth quarter, with 20 deals closing in Q4 2009 as compared to an average of 15 per quarter for the first nine months of the year.
Prices Down Only Slightly
Despite this decline in the number of transactions, prices held up pretty well. The primary valuation metric, Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA), averaged 5.7X for 2009, down only slightly from 5.8X in 2008.
As has been the case in past years, transaction size had a major impact on deal pricing. For the smallest category of transaction, (total enterprise value of from $10 to 25 million), the average ratio of total enterprise value to EBITDA was 4.9 X. For the largest transactions, ($100 to 250 million), this ratio was 6.5 X.
More Equity Needed
Lenders continued in 2009 to maintain the cautious outlook toward financing buyout transactions that they had begun to adopt in the fall of 2008. Total debt on 2009 transactions averaged 2.4 X EBITDA, (versus 3.1X in 2008). Senior debt averaged 1.7X EBITDA in 2009, as compared to 2.3X in 2008. Senior debt initial interest rates averaged 6.6% in 2009, down from 7.0% in 2008. As a result of declining debt levels, average equity contributions to transactions remained high, at 58.9% in 2009 as compared to 48.5% in 2008.
The Cost of Doing a Deal
GF also keeps track of buyers’ transaction expenses. For 2009, these expenses averaged 4.3% of deal price, down from 4.5% the year before. This works out to about three months worth of EBITDA for the average deal.