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Half full or half empty? That’s the question for middle-market private equity at the end of the first quarter.

Private equity groups paid up as purchase-price multiples rebounded despite increasing cost of capital and challenges in the banking sector, according to reports from GF Data.

Valuations on deals completed in the first quarter of 2023 averaged 8.0x Trailing Twelve Months (TTM) adjusted EBITDA, rebounding from the 6.9x average recorded in 4Q 2022 and in line with the 8.2x average set in the third quarter.

“Anecdotally, we also saw several platforms acquired at higher multiples in the $10 million to $25 million size tier,” said GF Data Managing Director Bob Dunn. “Not something I would have expected in the current market.”

At the same time deal flow remained constrained, debt pricing surged, and there’s a notable gap between prices paid for top performers and everyone else, some of which are likely holdovers from prior quarters negotiated down.

GF Data’s private equity contributors reported on 70 transactions in the first quarter meeting our updated parameters – Total Enterprise Value (TEV) $10 million and $500 million and TEV/Trailing Twelve Months (TTM) Adjusted EBITDA to 3 to 18x – in line with the tallies through the last three quarters of 2022, and well off the torrid pace of the fourth quarter of 2021.

The first quarter saw a significant increase in cost of capital, with average pricing on senior debt reaching 8.1 percent, compared to an average of 6.7 percent in the fourth quarter and pricing on subordinated debt also up markedly.

“The GF Data report confirms that we continue to see high valuation multiples and the Tier A deals are continuing to get bid up as competition remains fierce,” said Stephen J. Gurgovits, Jr., Managing Partner, Tecum Capital. “This is a bit surprising given the rise in rates, but it is also indicative of the surplus of capital still chasing good deals.”

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