In the second quarter of 2009, middle-market private equity continued the slump in activity we saw in the first quarter.  Based on market data and our own observations in the marketplace SDR has identified 3 strong themes for the second quarter.  Specifically,

  1. Deal Volume has Slowed – In the second half of 2008, GF Data Resources’ 128 contributing Private Equity firms reported 60 completed deals.  For the first half of 2009, this figure dropped drastically to just 21 completed deals.  A major contributing factor to the depressed volumes is the lack of leverage capital available.  In fact, the second quarter deals were completed with 62.9% equity financing, up from 50.9% in the first quarter.
  2. On both a local (Front Rage of Colorado) and national level, SDR has sensed a market paralysis with almost all players waiting for the perceived bottom. However, with significant pent-up capital and dealflow, SDR is confident that deal volume will increase dramatically through the balance of 2009 and well into 2010.

    Multiples - Deal Volume August

    Source: GF Data Resources

  3. Flight to Quality – Despite the significant drop in deal volume, the deals that were completed in the second quarter of 2009 posted an Adjusted EBITDA of 6.6x, up from 5.8x in the first quarter of 2009.  This valuation eclipses the average multiples posted for the previous 9 quarters, dating back to the first quarter of 2007…well before the market downturn of 2008/2009.
  4. Undeterred by this data, SDR is in the process of taking several clients to market. The overwhelming response from traditional private equity players has been positive, especially in relation to healthy clients that have thrived in the downturn.

  5. Limited Capital Availability – In the second quarter of 2009, senior and subordinated lenders continue to pull-back in the middle-market. Average total debt for the quarter declined to 2.6x from 3.0x. With only 21 reported transactions, it makes more sense to view the capital supply over a longer period. Specifically, in the last three quarters since the Fall financial meltdown, total debt averaged 2.8x. In comparison, the prior three quarters (first nine months of 2008) total debt averaged 3.4x
  6. As a subordinated debt lender, SDR is on the front-line of the private capital market. Capital inquiries have skyrocketed in response to the senior credit markets tightening. In the past three quarters (Q4 2008, Q1 2009 and Q2 2009) SDR has logged 186 debt inquiries. In the three quarters prior to the financial meltdown (Q1 2008, Q2 2008 and Q3 2008) SDR logged 125 debt inquiries.

    Equity and Debt

    Source: GF Data Resources