Middle Market M&A Heats Up

Middle market M&A is sizzling.

“We’ve never seen the level of deal flow that we’ve seen in the last four to five months,” said Andrew Janower, a managing director at Charlesbank Capital Partners, during a panel Tuesday at the Dow Jones Private Equity Analyst conference.

Janower said he spoke recently to a boutique firm that claims to have 100 active M&A processes underway currently and 200 investment bankers at work. “That’s an indicator of how busy the M&A market is,” he said.

Janower, who later spoke to peHUB, said a huge number of companies are looking to sell. Many of these businesses are touting strong 2010 earnings due to the cost reductions they made in 2009. The large number of sellers is also due to a backlog that has built up over the last couple of years. Many family-owned or sponsor-owned companies believe now is a good time to seek liquidity, Janower said.

The debt markets also have rebounded. “The credit markets have come back so strongly that it is starting to reinflate asset values,” Janower said. However, the Charlesbank MD wouldn’t comment whether he believes another asset bubble is forming.

For example, companies could get 3x leverage on their EBITDA in 2009 and possibly sell at 6x multiples. This year, companies have higher earnings and can get 4.5x leverage. This means they hypothetically could sell for 7x multiples. “Sellers intuitively understand that with strong growth in 2010 earnings versus 2009 and the rebound in the credit markets, buyers can afford to pay substantially more for a given company than they could this time last year,” he said.

While it is a good time to sell, it is a dangerous moment to be a buyer, he said. There are still big risks in the macroeconomic environment with fears looming of a double dip recession. Many good companies that looking to sell have very high margins, he said. “The challenge is to figure out which ones will sustain those margins and grow.”