Middle Market Private Equity Stalls

September 24, 2012

Data from market researcher GF Data shows that after experiencing brisk activity in the second half of 2011 and the first quarter of 2012, middle-market private equity deal volume came to a standstill in the second quarter of 2012. M&A deals in the $10 million to $250 million range completed by mid level investment firms during the second quarter totaled just 30, well below the average of 45 such private equity deals in each of the three previous quarters.

Private Equity Adopts a ‘Wait and Watch’ Approach

GF Data CEO Andrew Greenberg says the lesser than expected completed private equity deal volume in Q2 is especially disappointing given an unprecedented availability of capital, improved corporate performance in many sectors and anticipated tax increases next year.

Greenberg says many lenders, deal principals and investors attribute the slowdown in private equity deal volume to uncertainty over the big picture of the economy. Commenting on the reluctance of private equity funds to take aggressive bets, Greenberg said, “While for many businesses and in many industries, this remains a great time to sell, this is not the first time we have seen private business owners respond to risk as ‘reverse diversifiers’ and remain concentrated in what they know best.”

Some Sectors Command Higher Premiums

An analysis of the 30 deals executed by private equities in the $10 million to $250 million range in the second quarter shows that larger companies continue to attract higher premiums. Throughout the first half of 2012, companies valued in the $50-250-million level demanded prices of 6.9 times adjusted annual EBITDA, on average. This compares to the premium of 5.6 times adjusted EBITDA for companies in the $10 – $50 million level in the first half of the year. Among sectors, companies within healthcare services stood out for higher premiums commanding prices of 7.9 times TTM EBITDA on average.

Quality of Deals Mixed

Tim Clifford, Founder and CEO of Abacus Finance in New York says a cause for concern is the increase in the number of companies being marketed with inconsistent financial performance, lower EBITDA margins and higher customer concentrations. He notes that many private equity firms that have traditionally focused on larger EBITDA-sized companies are now looking at companies valued in the $10 to $250 million range. This has resulted in ample availability of capital.

The reduced number of private equity deals in the second quarter despite the availability of plenty of deal capital suggests that the private equity funds are concerned about the macro-economic picture. Given the cautious approach by most fund managers, it is unlikely that private equity funds will be aggressively ramping-up the staff count and this will likely keep the private equity job market stressed in the near term.

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