Buckle up for another year of financial rollercoaster madness, brought to you by the unpredictable dance of EBITDA multiples and the continuing climb of debt costs. Yes, we blame them entirely for the sarcasm.
In the first quarter of 2023, we observed an increase in valuation multiples across all deal sizes, following a decline in the fourth quarter of 2022. This trend mirrors what is happening in the stock market. When analyzing the data on completed transactions, we noticed that only a select portion of the market is experiencing gains (high quality transactions), similar to 7-10 companies driving the stock market gains.
In Q3 2022, equity contributions in M&A transactions amounted 54.3% of the total contribution in deals, but this dropped to 41.2% in Q4 2022 while debt increased from 45.7% to 58.8%. Private equity investors are no longer paying up with equity contributions on transactions. This shift indicates that valuations have come down and are normalizing towards the mean after a period of elevated multiples.
With several interest rate hikes in the books and more expected, the immediate impact of interest rate increases has been felt in the debt markets with the cost of senior debt increasing 190 bps in the past quarter. Senior debt pricing increased from an average of 4.7% in Q2 to 6.6% in Q3 at the same time that the overall TEV EBITDA multiples increased from 7.4x to a record 8.1x TTM Adjusted EBITDA as reported by GF Data.