A February 19th article in Private Equity Professional Digest titled The Resilient Middle Market Delivers Again: Deal Volume and Valuations Held Steady in Q4 points out that “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 (GFDR), a proprietary database that collects data on private-equity transactions valued between $10 million and $250 million.”
In its Q4 report GFDR identified several trends regarding the current state of the market that lower middle-market business owners will want to take note of:
- 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.Â 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.Â 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 increased.
- Among industries, health care services remained particularly active, with valuations averaging about 7.0x in the last six months of 2008.
In his commentary, Andrew Greenberg, CEO of GFDR notes that the transaction volume both before and after the financial industry meltdown came into full effect in the fall is comparable and evidence suggests that lower middle market (deals valued below $100 million) are likely to continue at the same level. CFA is one of over 100 firms that report transactions to GFDR.
In a period of mostly bleak business news it is good to see that in the lower middle-market there is a degree of steadiness for businesses that are making plans to transfer ownership. While these are challenging times, each business is unique and we believe now is a good time to initiate the process of finding a quality buyer or investor. Do you agree or disagree?