Q1 Saw 52% Drop in Lower Middle Market PE Deals

Yikes, what a difference a quarter makes.

2011’s first quarter saw far fewer lower middle market PE deals. In fact, there were 29 deals in Q1, down nearly 52% from the 60 transactions reported in fourth quarter of 2010, according to GF Data Resources, which tracks middle market PE deals.

However, the results are up roughly 53% from the 19 deals closed in first quarter 2010–so there’s some good news, if one looks for it. GF Data defines the lower middle market as transactions from $10 to $250 million; 159 PE firms contributed to the report.

GF Data attributed the high number of deals in fourth quarter to expected–but not enacted–changes to the tax laws. “The market was catching its breath from all the activity during the third and fourth quarter,”  said Andrew Greenberg, GF Data’s CEO and co-founder. “In spite of the drop-off, we’re seeing market conditions as fundamentally healthy and continuing to improve.”

Deal multiples remained strong. For the third straight quarter (this refers to Q3 and Q4 of 2010 plus Q1 of 2011), lower middle market deals posted multiples of 6.1x trailing twelve months adjusted EBITDA. This is up a near full-turn from the 5.2x reported in first quarter 2010. Total and senior debt multiples also held steady. Total debt remained in the low three’s and senior debt in the low two’s. This confirms that debt continues to be available in the middle market, GF Data said. “Buyers are feeling more comfortable paying up a bit for middle market properties,” Greenberg added.

Equity contributions have also inched up to 51.8% in first quarter, compared to 50.6% in all of 2010. But this is down from 2009, the height of the financial crisis, when equity contributions were in the high 50’s, Greenberg said. Equity contributions have risen because “valuation multiples have picked up at a greater rate than leverage multiples,” he said.