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Following a first quarter that saw highs and lows – purchase-price multiples and deal volume, respectively – last quarter provided little but lows.

Dragged down by high interest rates and post-pandemic challenges, average purchase price multiples dropped markedly across all deal sizes, resulting in a more than a full-turn decline from the first quarter, according to reports from GF Data. At the same time, GF Data’s contributors reported the lowest number of qualifying quarterly deals since the start of the pandemic.

Valuations on completed deals in the second quarter of 2023 averaged just 6.4x Trailing Twelve Months (TTM) adjusted EBITDA—a drop of 1.3x compared to the buoyant first quarter valuations and off more than a half-turn of EBITDA from the third quarter of 2022, which posted the lowest valuations seen since 2020’s third quarter.

“It’s clear based on the low deal volume that interest rate hikes and questions about the broader economy are keeping deals from getting done,” said Bob Dunn, GF Data’s Managing Director.

Across the prior two quarters the average purchase price was 7.2x, which compares to an average of 7.6x for all last year.

Deal volume offers an even dimmer picture of the market at the year’s mid-point. GF Data’s private equity contributors reported on just 57 transactions in the second quarter meeting our updated parameters—Total Enterprise Value (TEV) $10-500 million and TEV/Trailing Twelve Months (TTM) Adjusted EBITDA 3-18x well below the totals for the last four quarters.

The strikingly low deal count last quarter— annualized, 2023 would mark the lowest deal volume tracked by GF Data in more than five years—is just one symptom of the challenges facing mid-market M&A.

The second quarter also continued to see significant upward pressure on senior debt pricing, surging a percentage point from the prior quarter to reach an average of 9.5% in the second quarter. All-in pricing for subordinated debt was up by a percentage point through the first half of the year compared to all of 2022, reaching 15.4%.

“With the increasing cost of debt impacting the ability to close new platform deals, private equity firms are turning to more add-on opportunities and value creation activities within their portfolio,” said Scott Linch, National Industry Leader, Private Equity from FORVIS.

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