PE Firms Invest More, Pay Less?

One of the big knocks on pre-crisis private equity was that it had eschewed its buy-low/sell-high mantra, in favor of buy high and (hope to) sell higher. A lot of it was properly pinned on cheap debt, but some was caused by a sheep-like portfolio land rush (“They did a deal? Well then, we’ll do a deal…”).

I bring it up today because of some new data from Thomson Reuters (download here), about PE-backed M&A volume in 2010 (through Monday). It works out to 1,755 global deals valued at just over $103 billion, compared to 1,558 deals worth nearly $39 billion over the same period in 2009.

In other words, average deal size is skyrocketing. My initial assumption was this was again a case of private equity investors straying from their knitting, perhaps egged on by competition borne of record fund overhang. But then I noticed the median EBITA multiples being paid in Q1 2010 were about the same as in Q3 2009 (between 7x-8x), and the Q2 2010 EBITDA multiple is still way lower than that of Q4 2009.

So does this mean PE firms, in general, are buying stronger companies? Or is there some other explanation for why deal sizes are climbing while EBITDA multiples are falling?