Q3 2008 Small-Cap Private Equity Report

According to a new report by GF Data Resources, a proprietary database that collects detailed data on private-equity transactions valued between $10 million and $250 million, small and middle market deal activity slowed slightly in Q3, but the full impact of the economic meltdown and credit squeeze has yet to be seen in the aggregate numbers. The 104 firms that contributed to the report completed 20 deals in the third quarter 2008, in line with the 42 deals that were completed in the first half of 2008.  These firms completed 133 transactions in all of 2007.

Points of interest from the report include: The primary valuation metric – Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA) – averaged 6.1x for the third quarter, up from 5.7x for the first half of 2008 and 5.8x in the second half of 2007. In the year following the onset of the credit crunch the numbers stabilized, but Q3 saw an uptick.

GFDR identified a number of emerging signs of a more difficult borrowing environment for business acquirers in the middle market:

– Senior debt – essentially, borrowing from bank lenders — declined as a multiple of cash flow from 3.1x adjusted EBITDA in the first six months of 2007 to 2.5x in 3Q ‘08.  Total debt – which also includes subordinated debt and other forms of junior capital – declined from 3.9x to 3.3x.

– With less available debt, buyers needed to increase their equity contributions — equity accounted for 49.2% of the average capital structure, a rise of nearly 10 percent from 39.5% in the first half of last year.

– As is often the case when bank lenders retreat and business sellers have not yet revised their expectations about value, subordinated debt providers began to play a more pivotal role in the market place. The percentage of deals utilizing subordinated debt increased over the past year from 45.2% in the first half of ’07 to 50.0% in 3Q ’08.

– Initial pricing on senior debt jumped from 6.6% in the first half of this year to 7.4% in 3Q.  This, however, preceded steady declines in lending benchmark rates since September 30.

The summary for your reading pleasure:

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One Response to Q3 2008 Small-Cap Private Equity Report

  1. J. Loewen says:

    This is a good reflection of private equity business being done in Canada.
    Since our banks are conservative, riskier financing is being done by privately held money.
    We also have an enthusiastic venture capital market with executives of large companies supplying much of the investment dollars.
    What the study does not show is the amount of money pumped into businesses by government. Our private equity deals are being funded by government money and it is squeezing out the private equity funds which is worrying.
    The same with the VC market, our government is having government officials place money and this pushes out the private market VCs.
    We do have interesting public/private partnerships like CYBF which just recieved $10M from the government but it allocates money and mentors to young entrepreneurs but the decision making is done by private sector volunteers (I’m one of them.)

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