The “size premium” GF Data has been chronicling over the course of 2011 remained in full force. Based on total enterprise value (TEV) of the acquired companies, average multiples were as follows: 5.3x at $10-25 million TEV; 6.1x at $25-50 million; 6.9x at $50-100 million; and 8.3x at $100-250 million.
“As we have seen in previous quarters, private equity firms invest in above-average financial performers with roughly equal frequency across the middle market,” said Andrew Greenberg, CEO and Co-Founder, GF Data. “But, smaller companies with stronger EBITDA margins and revenue growth simply are not accorded the same premiums given to businesses that offer both strong financial performers and greater size.” For businesses valued at $10-$25 million TEV the premium is only 101%, while companies in $50-$250 million TEV the premium is 106%.
GF Data’s Third Quarter report encompasses 1,278 transactions involving firms valued at $10-250 million TEV reported by 183 private equity contributors. This group completed 34 transactions for the quarter, six more than the 28 reported for the second quarter.
This report also features expanded valuation parameters. GF Data included deals valued at 10-12x adjusted EBITDA, widened from 3-10x in prior reports. GF Data has always used 3-12x in its on-line searchable database available to contributors and paid subscribers. This change, which resulted in 36 transactions being added to the GF Data universe, was based on the conclusion that the narrower parameters were resulting in the exclusion of some highly valued transactions that deserved to be included in the aggregate data.
“Valuations on both smaller and larger deals are influenced more by the size of the deal. In the upper tier of the lower middle market, leverage availability is a greater differentiator when it comes to valuations,” said B. Graeme Frazier, IV, Principal and Co-Founder of GF Data. “While valuations in the $10-25 million and $25-50 million size range have remained in line with 2010 averages, the increasing multiples throughout 2011 have been concentrated in larger deals within our data sample, mostly because of increased lender interest.”
“As the Q3 GF Data report shows, middle market transaction activity remains strong – both from a volume and valuation perspective,” said David Dunstan, Managing Director at Western Reserve Partners. “However, as the data also shows, we continue to witness a pronounced valuation gap between the upper and lower middle market. Lenders are eager to pump credit into larger deals and financial sponsors, still sitting on record levels of un-invested capital, have increased their equity contributions to remain active in an increasingly competitive environment. Nevertheless, we believe high quality companies will continue to garner premium valuations, regardless of size, and we expect deal volume to remain strong in Q4.”
Additional Data Highlights:
As mentioned above and in GF Data’s 1Q and 2Q reports, unprecedented differentials are emerging based on the size of the businesses being acquired. For the first nine months of 2011, the aggregate multiple is 6.1, but the breakdown by TEV is as follows: $10-25 million – 5.3x, $25-50 million – 6.1x, $50-100 million – 6.9x; and $100-250 million – 7.2x.
Debt levels both reflect and contribute to these dramatic breakpoints in valuation. Total debt averages range from 2.9x at $10-25 million to 4.7x in the $100 -250 million tier.
Over the eight-year life of the sample and in 2010-2011 year to date, the reward for better financial performance is highest in the $25-50 million grouping. GFDR collects, analyzes and reports on private equity-sponsored M&A transactions in the $10 million to $250 million value range.
GFDR’s quarterly reports contain high-level valuation and leverage data. The firm also provides detailed valuation data in specific industry categories through its web site. Individuals and companies interested in more information can contact GF Data Resources by visiting their website www.gfdataresources.com.