Q3 2009 Middle-Market Private Equity Status

GF Data Resources has released third quarter statistics that show a continuation of the trends reported throughout much of 2009.

Based on market data reported by 122 active private equity firms and our own observations in the marketplace SDR has identified 3 strong themes for the third quarter.

Deal Volume Remains Low
Through Q3 2009, GF Data’s 122 active contributing private equity firms have completed 38 deals; a striking contrast to the 88 completed deals reported at this time last year.  Quarterly deal volume in 2009 has seemingly leveled off at approximately 13 deals per quarter; effectively signaling that only 1 in 10 actively reporting private equity firms complete a deal each quarter.  Put another way, only 3 in 10 active private equity firms have left the sidelines in 2009.

Source: GF Data Resources

Flight to Quality
Q3 2009 continued to see a flight to quality. Premiums in the marketplace have been awarded to companies with TTM EBITDA margins and revenue growth both exceeding 10%.  These “Quality Businesses” are receiving premium valuations at pre-downturn levels.

Source: GF Data Resources

Multiples are Down
Pricing on all deals completed in Q3 2009 fell to 5.1x TTM adjusted EBITDA – the lowest for any quarter in GF Data’s six-year reporting history.  While premiums are awarded to good deals, those deals appear to have grown scarce in Q3. Of the 13 deals completed in the quarter, only 2 deals could be classified as “quality” deals.  While we hesitate to draw conclusions on a 2 deal sample, it is noteworthy that these 2 “quality” deals acheived a rather low multiple of 5.6x TTM adjusted EBITDA.

Source: GF Data Resources

SDR continues to perceive a market paralysis on a local and national level. Market players are awaiting a perceived bottom and/or focusing on strategic initiatives within existing portfolio investments. Numerous factors point to a cataclysmic shift in deal activity on the horizon:

  • Tremendous amounts of capital was raised between 2005 and 2008.  Generally speaking this capital has a 5 year harvest window and much of the capital raised has yet to be put to work.
  • Stung by macroeconomic forces, numerous operating companies that considered an exit or liquidity event in 2009 have delayed entering the market.  For the past few months, SDR has been reporting that numerous economic indicators (1, 2, 3) are signaling a recovery, essentially removing the macroeconomic forces that have held exit plans in check.
  • Much like private operators/shareholders, private equity firms have been scrambling to maintain performance levels within existing portfolio companies.  As the recovery gains momentum, traditional investors can put down the fire hoses and resume the search for new investments.

SDR believes that 2010 will be a break-out year in terms of deal volumes.  Companies considering an exit or liquidity event in 2010 or 2011 need to make appropriate adjustments and preparations now to take advantage of the impending increase in deal activity.

If shareholders envision an exit or liquidity event in 2009, window-dressing, strategic initiatives and initial preparation should be underway currently.  Don’s “Fix the Gutter Now” article would be a good starting point for shareholders serious about maximizing value.