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.
When analyzing the most recent private equity multiples, it shows there has been a reversion to the mean, with the outlier being in the $25-50 million range. It is expected that deals of this size will experience declines in multiples towards the long-term historical mean, consistent with other middle-market transactions. The multiples paid in fourth quarter are based on historical EBITDA and the future earnings of the businesses, but certainly current events were not considered in these multiples.
The most recent GF Data shows us what we expected: multiples contracted compared to last quarter in all deal sizes except deals greater than $100 million. For all deals under $50 million, the TEV/EBITDA is still slightly above the historical multiple average by 0.2x turns. Deals in the $50 to $100 million market are trending above average by 0.5x turns and deals over $100 million are well above their historical average at 2.2x turns higher.