PE deals for U.S.-based companies are commanding an 11.5x multiple throughout the first half of 2014, well above the 10.4x clocked in 2013, notes PitchBook Data Inc. from Goldman Sachs (H/T ZeroHedge)
PitchBook along with Merrill Datasite published a report titled “3Q 2014-U.S. PE Breakdown” highlighting that though PE deal flow dropped in 2Q 2014, the capital invested was strong.
Deal multiples at historic high with debt financing
According to the report, armed with cheap debt financing, PE firms have been pushing purchase price multiples beyond what many strategic acquirers are willing to pay. The report points out that to win deals, PE investors have pushed valuations to historically high levels and have added an extra turn of debt to their transactions.
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The cheap credit is having significant impact on the deal-making environment. As can be deduced from the following graph, the median debt percentages for 2014 deals has hit 72%, a jump of 6% over 2013. Moreover, leverage use has skyrocketed since 2011, when the median debt percentage for PE deals was around 55%.
Interestingly the median debt percentages in 2013 and first half of 2014 both outpaced the percentages witnessed during the buyout boom. Significantly, even in 2007, the median touched only 63%.
As depicted in the following graph, higher debt levels have pushed valuation/EBITDA multiple to a historic high of 11.5x.
On the other hand, equity-to-EBITDA multiples have been muted. For instance, this year the median has shrunk to 3.3x, down from 3.6x in 2013 and way down from the 3.9x median clocked in 2011.
Fewer mega deals
The PitchBook/ Merrill Datasite report points out that so far this year, PE firms have largely held back from making investments in the greater-than $2.5 billion range. For instance, only two such mega-deals closed in the first half of 2014. Moreover, as set forth in the following graph, transactions of less than $500 million accounted for over half of all capital invested in 2Q2014:
Trend in deal count by industry
Pointing out a trend in the deal count by industry, the report highlights that each industry’s share of overall deal flow resembles pretty much those witnessed consistently since 2009. As captured in the following graph, B2B accounts for about a third of PE investments, while B2C taking up 20% followed by Information Technology with about 13% to 15%:
Slicing and dicing the deal data further in terms of region, the PitchBook/ Merrill Datasite report notes thanks to increasing activity in the information technology sector, the Mountain region has witnessed its share of overall U.S. PE deal flow grow from 7.3% in 2011 to 9.2% through 2Q 2014:
The report also summarizes the players involved in various deals:
The report concludes that valuations would remain at high for the next several quarters, thanks to high amount of available capital and debt financing, coupled with a dearth of quality assets in the market.