Contrary to expectations, middle market deal volume and valuations held steady from the third quarter to the fourth quarter of 2008. However, the economic crisis severely affected debt levels, which declined dramatically, according to GF Data Resources’ Middle Market M&A Valuation Report for the fourth quarter of 2008. GF is a proprietary database that collects detailed data on 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,” Andrew Greenberg, GF Data Resources’ CEO said, adding, “debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals.”

“This is comparable to deal volume both before and after the financial industry meltdown came into full effect in the fall,” Greenberg explained. “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 to $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, 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,” Greenberg noted. “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 of 2008. 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.” Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their Website.