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Published PEI Media — Mid-market private equity transactions in North America this year show a significant disparity in valuations for large and small businesses, due in part to increased availability of debt for larger deals, according to GF Data.

Renewed lending activity from large commercial banks, business development companies and other lenders has contributed to record high valuations for large businesses in the mid-market, while smaller companies continue to be priced at lower multiples of earnings before interest, tax, depreciation and amortisation, according to a new report from GF Data.

A group of 28 private equity deals from the US and Canada completed during the second quarter show that valuations for companies with total enterprise value between $10 million and $25 million had an average EBITDA multiple of 5.2x, while valuations for businesses in the $100 million to $250 million range reached a record-high average of 7.5x.

There is no doubt that this greater availability of debt has quickly been factored into valuation expectations, chief executive officer of GF Data Andrew Greenberg told Private Equity International. That availability simply does not extend to the business or the buyer of the business with $2 million to $5 million of EBITDA.”

Large banks aren’t interested in providing capital for smaller businesses whose performance is more erratic during periods of economic uncertainty, Greenberg said. Companies in the lower end of the mid-market have traditionally found capital from community and regional banks, but those institutions have had to address their own balance sheet problems, he added.

The 28 deals during the second quarter were just slightly under the 32 reported during the first quarter of the year, but less than half the 63 deals completed in Q4 2010. Deal volume was sluggish, the report said, due to record breaking deal flow during the last four months of 2010 as firms scrambled to complete realisations before an anticipated change in tax law that was never enacted.

I think the deal flow is more restrained at the lower end of the mid-market, first by the continued gap in valuation expectations, but then also, these small companies remain more vulnerable in upsets in their performance, Greenberg said.

GF Data Resources collects data on mid-market private equity-backed deals with enterprise values between $10 million and $250 million. The company’s database includes information on 1,481 transactions closed between 1 January 2003 and 30 June 2011.

PEI Media Ltd.