Daily News: May 23, 2012

Private Equity Deal Volume Exceeds Expectations in First Quarter

Private equity deal volume in the first quarter of 2012 exceeded expectations, GF Data reported.

“Most private equity professionals are predicting a flood of deal activity in 2012. The volume of reported deals in the first quarter suggests it’s already starting to happen,” said Andrew T. Greenberg, GF Data’s CEO and co-founder.

“Over the prior eight years covered in our data universe, completed deal volume dropped an average of about 25% from the fourth quarter of one year to the first quarter of the next. This year’s 10% dip decline compares especially favorably with the 42% drop-off in the first quarter of 2011 following the 2010 end-of-year rush,” Greenberg said.

“With unprecedented cash on hand, improving corporate performance and expectations of federal tax changes in 2012, financial buyers and other deal professionals are expecting a strong year,” said B. Graeme Frazier, IV, GF Data principal and co-founder. “We expect momentum to continue from here.”

The active contributors to GF Data’s reports – 167 middle-market private equity firms – reported on 45 deals completed in the first quarter of 2012, down slightly from the 50 completed deals in the fourth quarter of 2011 but up significantly over the 37 deals completed in the first quarter of 2011.

GF Data’s first-quarter 2012 report includes valuation, volume, leverage and key deal-term data on 1,332 private equity backed transactions in the $10 million to $250 million value range completed since 2003. The data reflects deal activity by 185 private equity firms, including 167 active contributors.

Deal-term data in the report indicate that the trend in 2011 toward “size premiums” is continuing. Firms valued in the $50 – $250 million range are commanding record average multiples of 7.8 times Total Enterprise Value (TEV) / Trailing Twelve Months (TTM) Adjusted EBITDA, while lower-middle firms valued at $10 million to $50 million went for an average of 5.6 times TEV.

First-quarter data also suggest that the “quality premium” – which GF Data measures by highlighting above-average financial performers based on their revenue growth and EBITDA margins – has been reestablished for larger firms after waning in 2011. In the first quarter of 2012, larger businesses reaped greater rewards for above-average financial performance. Across the sample, firms with above-average TTM EBITDA margins and revenue growth rates were valued in the first quarter of 2012 at a 7% premium over lesser performers. At $50 million to $100 million TEV, that premium was 22%. At $100 million to $1250 million TEV, it was 43%.

“The data certainly reinforces the positive sentiments we have observed at all levels of the middle market as both sponsors and lenders are eager to deploy capital,” said Paul Colone, managing director at C.W. Downer & Co., a Boston-based investment bank. “We continue to see strong momentum both in terms of deal activity and valuation multiples and we expect sellers will seek to take advantage of these market conditions during the second half of 2012.”

Total debt multiples for the quarter remained in the mid-threes, up slightly from 2010-11. The average equity contribution for the quarter was 47.2%, in line with the 48$ average for 2011. However, as valuations in much of the lower-middle market surge at a greater rate than increases in bank debt availability, subordinated debt is making up the difference. Subordinated debt accounted for 18.9% of average capital structure, up from the 12% to 15% range the prior two years.

GF Data provides data on private equity sponsored M&A transactions with enterprise values of $10 to $250 million, offering private equity firms and other users reliable external information to use in valuing and assessing M&A transactions.