The good news is that deal volume is moving incrementally higher, reflecting growing confidence among private equity buyers; the bad news is that prices are also rising, showing a “pronounced increase” according to GF Data Resources’ third-quarter report.
Philadelphia-based GF Data, which tracks transactions of 163 participating mid-market PE firms, reported that the number of deals in the third quarter represented the highest figure over the past seven quarters. Meanwhile the average purchase price multiple reached 6x trailing 12-month Ebitda, up significantly from the previous four quarters that saw valuations reside in the 5x times Ebitda range.
GF Data specializes on the small and mid market, tracking deals between $10 million and $250 million in size.
Andrew Greenberg, CEO and co-founder of the data provider, said in a statement that he believes deal volume “will continue to expand” heading into the New Year. He added the caveat that the market has not reached the point at which it would be “impervious to backsliding.”
Breaking it down by segment, GF Data cited deals in the manufacturing, business services and healthcare sectors as contributing to the uptick in valuations. Deal multiples in the media and retail industries, however, continued to be soft.
The last time average enterprise multiples exceeded 6x was in the second quarter of last year, a period marked by a “flight to quality,” according to the authors of the report, when just 16 deals were documented.
Leverage multiples, with total debt averaging 2.7x Ebitda year to date, represents an improvement over the year-ago corresponding period. Equity contributions from sponsors, meanwhile, still typically make up more than half of the capital structure, showing a year-to-date average of 54.2 percent and underscoring a cautiousness that still pervades sponsor activity.