PE deal market stalls, but still rewards size and quality

BVWireIssue #119-4
August 21, 2012

Despite all the available capital, the improvements in corporate performance, and the anticipation of a federal tax rate increase, the “expected torrent of deal activity” in the private equity market didn’t materialize, says Andrew Greenberg, CEO of GF Data, which provides subscription reports on M&A transactions in the $10 million-to-$250 million value range completed by middle-market PE firms.

The latest GF Data report shows only 30 completed deals in the second quarter of 2012, well off the average of 45 deals in each of the preceding three quarters. The trend toward higher premiums for larger companies continues, however: In the first half of 2012, companies in the $50 million-to-$250 million value range commanded prices, on average, of 6.9 times trailing 12 months (TTM) EBITDA, compared to a 5.6 multiple for companies valued at less than $50 million. Average equity contribution in the second quarter was 53% on the larger deals, compared to 47% on the smaller. The data reflect a “double-whipsaw in favor of larger sellers,” Greenburg said. “Their buyers get more leverage and are inclined to stretch more on equity to get deals done.”

Quality also continued to command a premium: “Businesses with above-average financial characteristics sold for an average five percent premium over other firms. The health-care services sector continued to shine, posting average multiples of 7.9 times TTM EBITDA.”

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