One of my favorite explanatory images is “the dog that didn’t bark” — Sherlock Holmes’s key to solving a mystery by paying attention to what didn’t happen as well as what did. As readers of GF Data’s most recent report may appreciate, the dog that didn’t bark is an apt metaphor for middle-market deal activity in the year to date.
GF Data’s first quarter analysis confirms what private equity buyers and financial professionals have sensed since the beginning of the year – that the explosion in deal activity heading into the end of 2012 carried no momentum into 2013.
The 183 private equity firms that are active contributors to GF Data(R) reported 92 transactions closed in the fourth quarter of 2012. The same universe reported 14 deals completed in 1Q 13 – by any measure a screeching halt. The GF Data universe encompasses deals with total enterprise values in the $10-250 million range.
“We’re sorry to confirm the anecdotal impression of business buyers and other deal professionals,” said GF Data CEO Andrew T. Greenberg. “Notwithstanding fundamentally good economic, corporate and capital market conditions, there were very few transactions in process once the deluge of deals aiming to close by year end worked their way through the system.”
Overall multiples for 1Q were 5.9x Trailing Twelve Months (TTM) Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), essentially in line with 6.0x in 4Q 2012 but well off the 6.8x mark in 3Q.
GF Data’s principals noted, however, that a closer reading of the data suggests aggregate multiples are not in decline.
B. Graeme Frazier, IV, GF Data Co-Founder and Principal, noted that the end-of-2012 groundswell appears to have been driven by individual or family sellers, presumably motivated at least in part by concerns about federal tax rates. “Non-institutional sellers drove a disproportionate share of the volume in 4Q, and we saw the drop in aggregate pricing. This trend continued in 1Q. It seems clear that pricing is at worst holding steady once these calendar-driven sellers come out of the mix.”
Dan Shea, Managing Director at BDO Capital Advisors in Los Angeles, commented, “Although M&A volume was practically shut off in 1Q, we are anticipating the year to be back end-loaded with deal activity. Lenders are actively supporting M&A transactions and we are starting to see nice momentum as a result of three years of improving corporate performance since the Great Recession. We believe valuations are likely to rise along with volume over the next several quarters.”