March 2009 | Issue 35
Contrary to expectations, middle market deal volume and valuations held steady from the third quarter to the fourth quarter of 2008. What changed were debt levels, which declined dramatically. This, according to GF Data Resources, a proprietary database that collects detailed data on middle market private equity transactions (valued between $10 million and $250 million).
“Fourth quarter valuations remained in line with quarterly averages dating back to mid-2007, when the mortgage lending crisis first affected public equity markets,” said Andrew T. Greenberg, CEO of GF Data Resources LLC. “However, debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals.”
Deal Volume Steady
The 114 private equity firms that contribute to the report completed 25 deals in the fourth quarter of 2008. By comparison, 27 deals were completed in the third quarter of 2008, and a total of 40 deals were struck in the first half of 2008.
“This is comparable to deal volume both before and after the financial industry meltdown came into full effect in the fall,” said Greenberg. “While the data suggests a continuation of activity in the lower middle market (deals valued below $100 million), it also provides evidence of a freeze occurring among larger deals where the pullback in credit has been more severe. Firms contributing to the report completed 13 deals in the $100 million – $250 million range in 2007, but only five in the same range this past year.”
The primary valuation metric, Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA), averaged 5.9x for the fourth quarter of 2008, down from 6.3x in the third quarter but up slightly from 5.8x in the second half of 2007.
More Equity Needed
Total debt and senior debt declined dramatically, falling to 2.4x and 1.9x adjusted EBITDA respectively. Those ratios were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x in the first half of 2008. As a result of declining debt levels, average equity contributions soared to 60%, up almost 20 percentage points from the third quarter of 2007.
“Private equity firms and intermediaries report that new deal activity has slowed in the past four months, with a corresponding decline in quality,” said Greenberg. “The data on deals completed in the next six months will determine whether or not these trends will become more apparent.”
Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their website.