In private equity transactions under $250 million, EBITDA enterprise valuation multiples fell to 6.7x from 7.4x EBITDA (-9.5%) last quarter. Total Debt to EBITDA multiples moved up to 3.7x (12%) compared to the previous quarter at 3.3x EBITDA, why and how this happened is worth discussing. Even though debt multiples increased quarter over quarter, senior debt multiples decreased slightly in the quarter by 0.1x while subordinated and mezzanine debt doubled from 0.5x to 1.0x EBITDA (GF Data).
Almost every business at one time or another enters into a banking relationship where they have a line of credit or some kind of term financing with banks. From a cost of capital perspective, debt is the least expensive capital that one can attain and should use appropriate amounts of leverage in running their business. Banks are an important partner in the growth of any successful business and must be treated that way.
In transactions under $250 million, EBITDA valuation multiples remain unchanged at 7.4x EBITDA, as the average Total Debt to EBITDA ratio decreased from 3.9x to 3.3x in the quarter. With valuation multiples not changing, private equity buyers increased their equity participation to complete deals from 3.5x to 4.1x EBITDA, resulting in equity investment increasing over 56% of the transaction value (GF Data).
In the first two months of Q1, 2020, deal activity was comparable to the previous quarter with TEV/EBITDA multiples maintaining values above the long-term historical average bolstered by higher than average Debt to EBITDA multiples. In March, when the COVID-19 pandemic began to impact the North American Market, all deal activity came to a screeching halt. Deals that were near being closed mayhave been completed, most other deals have hit the pause button waiting for more certainty.
Living in this unprecedented time, many businesses are experiencing challenges with their capital resources. Whether you are a business with established cash flows or a growth company, it appears that revenues are going to be negatively impacted in the near term. It is important for those companies having capital requirements in the near future, that they react and start preparing for a capital raise. One can’t overemphasize, those who don’t begin engaging with capital providers for future required capital may likely be left standing in line.