This week we speak with Andrew Greenberg, CEO and Co-Founder, GF Data Resources, and Managing Director of Fairmount Partners [GF Data Resources collects, analyzes and reports on middle market private equity sponsored M&A transactions with enterprise values of $10 to 250 million.] …
OTL: Andy, you’ve developed a valuable niche by publishing data for the lower middle market. How did you first get the idea?
AG: There’s no mystery to the fact that there’s not great data available on the less-than-$250 million transaction size market. So about five years ago, my partner Graeme Frazier and I started asking PE friends if they would participate in a service that gave you metrics for smaller deals.
OTL: And the response was positive.
Yes, we immediately signed up twenty sponsors to report their data. Today that number has grown to almost 170 firms who trust us with their information.
OTL: How much data does that represent, and how do you manage the reporting?
The sponsor reports information on each of their transactions by entering the data on-line. Then that data is batched by Coriendo, the firm that developed and now manages our on-line utility. This acts as a filter or wall between us and the reporting party. Any questions or corrections get sent back through the utility to the sponsor for confirmation. In this way we’ve now collected data on over 1,400 middle-market transactions.
OTL: What kind of trends have you been seeing recently?
Purchase price multiples have held fairly steady overall, but our last report touched a chord by noting that the disparity in multiples based on deal size is hardening.
Meaning that while larger middle market deals always get some premium over smaller similarly sized transactions, the differential has never been greater. Specifically, in the first half of 2011, deals in our universe in the $100-250 million value range traded at an average of 7.5x Ebitda, vs. 5.2x in the -$10-25 million bracket.
OTL: Regardless of deal quality?
Actually, in our last report, we crosscut data for the last three and a half years by deal size and by financial performance. We define above-average financial performers as firms with trailing twelve month EBITDA margins and revenue growth approaching or above 10%. It’s important to note that the balance of our sample are not bad deals – they all got to a closing with a private equity buyer – just less strong based on those two metrics.
Throughout 2008 to 2010, the reward for better performance was .4-.5x – in other words, about half a turn – for deals with values of $10-50 million and those with values of $50-250 million. For the first six months of 2011, that differential remains on the smaller deals but has all but evaporated on the larger ones.
OTL: So why are smaller companies getting short shrift?
There’s less visibility in the numbers, for one thing. They also have less leverage with customers and vendors. And they’re more vulnerable to surprises. But the real problem is getting financing; they’re less able to borrow.
I know that’s not new news, but it’s a huge public policy issue. Where do you go to get cash-flow based loan to finance the acquisition or growth of a $3 million Ebitda company?
OTL: It just doesn’t seem like any of the public policy makers get it.
Actually the whole mark-to-market requirement for private company business holdings, and requiring all private equity sponsors to register with the SEC, has been this Administration’s gift to us.
OTL: Andy, some of your fans may not realize that you also have a day job.
That’s right. I’m a managing director at Fairmount Partners, an investment banking boutique based in suburban Philadelphia. We have twenty professionals and focusi on middle-market businesses in but also above the $10-250 million value range. We specialize in health care services, business services, tech and software and industrial and consumer products. I run the industrial and consumer practice area.
OTL: What’s your pipeline of deals looking like?
Pretty solid. Our first half was quite strong and the pipeline has not been this full in two or three years. We see a good mix of private equity interest in our deals. For example, we closed two leveraged recaps in the past year, both in health care services. One was Continuum Health Alliance, a physician’s management services company that attracted a lot of private equity interest and then completed a deal with a large hospital system. The other was BioRx, a distributor of specialty pharmaceutical products, that completed a transaction with Symmetric Capital. Both of these businesses attracted healthy valuations.
OTL: How big were these companies?
Both were less than $10 million in Ebitda.
OTL: Really? That flies against the data you’ve been reporting.
Our practice enables us to see the premium valuations being attached to larger deals, but in all of our industry areas we also see that outstanding businesses with less than $10 million of EBITDA can still attract a lot of interest and strong valuations. That is in spite of all the headwinds in the global economy.
OTL: Don’t remind us.
I talk to a lot of people around the country and there seems to be universal agreement that the unprecedented amount of cash in the hands of strategic and financial buyers is the over-riding favorable driver in our industry right now. Middle market business owners and managers still need to make their way through some challenging economic conditions.
OTL: Yet buyers are buying.
$10 million in Ebitda is such an inflection point. There’s something about a $50 to $100 million valuation deal that hits people’s sweet spots. It’s large enough to have management depth, decent systems, a reasonable share of market, etc. – but it’s small enough to be financed handily, often by a single source debt provider.
OTL: Going back to your night job, any final thoughts about the research side of things?
As I mentioned, we feel very strongly that there is absolutely no basis in public policy for the requirement – which is now scheduled to take effect next March – that private equity firms with more than $170 million in assets register as investment companies, or that these firms mark their portfolio investments to market monthly. . But this gives us the opportunity to serve the industry by being a reliable source of private company data.
OTL: You just have to keep your reputation as an honest broker of confidential information.
Well, I tell people we’re like doctors. We see a lot, but it’s in the interest of science.
Reference: “On The Left” is Churchill Financial’s weekly snapshot of deals and trends in the capital markets, with special attention paid to the middle market leveraged lending space.
Week of October 17, 2011 | Week of October 24, 2011.