Debt usage remained low while equity contributions stayed high in the third quarter, a report from PitchBook shows.
Median debt usage rose to 51 percent of enterprise value in Q3, PitchBook said in “PE Deal Multiples.” That’s up from 50 percent in the second quarter. Deal prices also rose but moderately, the report said.
Deal multiples, meanwhile, jumped in Q3, PitchBook said. Median enterprise values increased to 8.4x EBITDA from 8x in Q2. That’s the highest EBITDA multiple seen since third-quarter 2012, PitchBook said.
The increase in multiples stemmed from the abundance of dry powder at PE firms, along with heightened competition from strategics and a limited supply of quality targets, PitchBook said. The PE industry had $839 billion of cash available at the end of the third quarter, Preqin said in November.
“It’s our view that the current environment of high prices and less leverage on PE deals will cause downward pressure on future returns,” Pitchbook said. “In order to limit their downside, firms cannot exercise enough caution when selecting portfolio companies.”
PitchBook combined its data with a survey of PE executives, conducted in November, to compile “PE Deal Multiples,” a spokeswoman said.
Average equity contributions dropped to 53 percent in the third quarter, the report said. That’s down from 61 percent in Q2 but still represents the second highest reported figure in the report’s history, PitchBook said. The surge in equity contributions is driven by PE firms increasingly paying higher EBITDA multiples to compete with strategic acquirers for top-tier targets, the report said.
Several executives at Buyouts’ PartnerConnect Southwest conference in late November also noted that equity levels were high, in the “45 percent range on average” for LBOs, according to Upacala Mapatuna, chief investment officer of Victory Park Capital. Credit providers are requiring the high equity as leverage levels climb, she said.
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A Wall Street sign is pictured outside the New York Stock Exchange on Oct. 28, 2013. Photo courtesy Reuters/Carlo Allegri