Jon Moulton of Alchemy Partners got PE tongues wagging earlier today, by saying that “it really would not be surprising in this recession if 30% of portfolio companies in the mid-market buyout firms actually failed.” He then softened it a bit, by adding that mid-market funds would “still come out better than mega-funds, because they had less debt going in.”
The first part of Moulton’s comment is obviously sobering, but the second part is a conventional wisdom that began forming while the good times were still rolling. Specifically, this notion of mid-market responsibility vs. mega-market irresponsibility — as if mid-market firms were putting down 20% on 30-year fixed mortgages, while mega-market firms were buying up McMansions with no-money down option ARMs. There’s some truth to it, but much less than you might think.
Specifically, let’s take a look at Standard & Poor’s data for 2007, which played host to a record-busting $765 billion in private equity transactions. It shows that purchase price multiples for mid-market deals (<$50m in target company EBITDA) were at 9.3x EBITDA, compared to 9.8x EBITDA for large-market deals (>$50m in target company EBITDA). It’s a gap, but nearly so significant as the fact that both groups were so much higher than historical norms.
We see the same thing in terms of leverage multiples (including both senior and subordinated debt). Mid-market deals come in at around 5.78x EBITDA, while large-market deals come in at around 6.19x EBITDA. Ditto for equity contributions, which were 32.14% for mid-market deals and 30.28% for large-market deals.
All of this kind of reminds me that while mid-market firms were talking about their responsibility in 2007, they also were talking about market saturation. Seems the competition helped drive up prices, just like it did in the large market.
That said, there are two counterpoints worth emphasizing. First, the S&P data could be a bit skewed, because it includes small-cap deals on the mid-market figures, while mixing large-cap and mega-cap deals in the other set. Second, the multiples gap expanded significantly in 2008 — with purchase price multiples for large-market deals coming in at 9.5x EBITDA, while mid-market deals dropped down to 8.3X EBITDA. It’s possibly Moulton was talking more about 2008 deals than 2007 deals, although 2008 volume didn’t hold a candle to the 2007 horde.
Here is the S&P data, in slideshow form: