All things are not equal in private equity’s middle markets.
There is a growing disparity in premiums paid for smaller mid-market buyouts ($10m-$25m enterprise value) and larger mid-market buyouts ($100m-$250m), according to research firm GF Data.
Specifically, the smaller-market deals in the first half of 2011 were valued at 5.8x EBIDTA, while the larger transactions came in at 7.5x. The former figure matches up closely to the 2010 comp, while the latter is over a full turn higher than 2010’s 6.x EDITDA mark.
“One reason that smaller businesses are at more of a discount is because cashflow-based lending has not yet come back, which means that the low valuations are a problem for buyers as well as for sellers,” says Andy Greenberg, CEO of GF Data. “The second issue is that the continued rockiness in the larger economy falls harder on smaller companies that are trying to get visibility on their performance.”
GF Data also found that 79% of smaller deals featured earn-outs and seller financing, which GF views as “yet another sign of a market less accommodating for smaller deals.” The annual average for such deal terms since 2003 has been between 40% and 50%, save for a 61% mark in 2008.