Middle market deal volume and valuations held steady in Q4MortgagePress.comeconomic crisis, valuations, GF Data Resources, Middle Market M and A Valuation Report , Andrew T. Greenberg
Contrary to expectations, middle market deal volume and
valuations held steady from the third quarter to the fourth quarter
of 2008, but the economic crisis severely impacted debt levels,
which declined dramatically, according to GF Data Resources, a
proprietary database that collects detailed data on private-equity
transactions valued between $10 million and $250 million. GFDR has
released its Middle Market M and A Valuation Report for the fourth
quarter of 2008.
"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."
The 114 firms that contribute to the report completed 25 deals
in the fourth quarter of 2008. By comparison, 27 deals were
completed in 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
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, down from 6.3x in the third quarter of 2008 but up
slightly from 5.8x in the second half of 2007.
"Total debt and senior debt declined dramatically, falling to
2.4x Adjusted EBITDA and 1.9x, respectively," said Greenberg.
"Those number were 3.4x and 2.6x, respectively, in the third
quarter, and averaged 3.4x and 2.5x respectively for the first half
"As a result of declining debt levels, average equity
contributions soared to 59.9 percent, up almost 20 percentage
points from the third quarter of 2007."
GFDR identified several trends that summarize the current state
of the market. According to Greenberg:
Average multiples on buyout transactions dropped from the
mid-6.0x range in the first half of 2007, and have remained in the
5.8x--6.0x range since. Valuations have held up particularly well
in the $50 million--$100 million TEV tier, where companies appear
to benefit from being large enough to mitigate at least some of the
risks relating to scale, but still small enough to get financing in
the current credit market.
To measure the extent to which good companies have begun to
accept reduced valuations, 200 buyouts completed since 2003 were
examined. All the firms analyzed exhibited "above-average"
financial characteristics, which is defined as trailing twelve
months (TTM) EBITDA margins and year one projected revenue growth
both exceeding 10 percent. The 12 such transactions completed in
the fourth quarter of 2008 traded at an average of 5.9x, compared
to a historical average of 6.2x and averages in the low to mid-6.0x
during the recent market peak of 2006 through mid-2007.
Debt spreads widened, as the 90-day LIBOR interest rate (a
benchmark for commercial lending) dropped from 4.1 percent on
September 30 to 1.4 percent at year end. Average initial pricing on
senior debt declined only slightly (from 7.4 percent to 7.2
percent), causing the average spread on senior debt to jump from
4.3 percent to 5.8 percent. Spreads on subordinated debt also
Among industries, health care services remained particularly
active, with valuations averaging about 7.0x in the last six months
"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."
For more information, visit www.gfdataresources.com.