Today’s study: GF Data Resources first half of the year private equity study Find the report here.
The study poses a handful of key credit-crunch related questions that we reporters have been asking for a year now. But instead of the vague or inconclusive answers we often get, GF DataResources has provided, concrete, measurable answers.
The most interesting questions address multiples, capital availability, and most importantly, that ever-repeated phrase, “flight to quality.”
I can’t count the number of times a PE professional parrots the “flight to quality” line when I ask if deals are getting done. It seems like a cheap way to say that your deals are quality deals. (If you’re doing deals, that is. If you’re not, then you say you’re “being cautious,” or “waiting out the storm.”)
But GF Data Resources breaks it down in scientific terms. The study looks at an admittedly small group of manufacturing buyouts from before and after the credit crunch. Of the companies purchased before July 2007, exactly half of the companies had 6.5x EBITDA or higher. Of the companies bought after July 2007, 60% were over the 6.5x bar. Sure, it doesn’t take anything but EBITDA into account (including the possibility of distressed/turnaround plays), but its the first attempt I’ve seen to quantify a cliche, and this, I applaud.
So yes, the study concludes, there is in fact a flight to quality. I’ll stop rolling my eyes every time I hear it now.
Concerning deal multiples, the study reports that multiples have remained stable for the past year, and are only down a half turn from pre-credit crunch times. Only a half turn? Seems low, but that’s because the study focuses on deals below $250 million. The study shows that valuations in that range average out around 5.6-5.8x adjusted TTM EBITDA, which is right on par with the second half of 2007, and only slightly down from pre-credit crunch deals. Multiples in the top of that range ($100 million to $250 million) fell the most, which confirms what we know: that the larger deals had the highest, most inflated multiples.
A parallel to inflated valuation multiples, of course is inflated leverage multiples. The sub-$250 million-market saw a strong correlation between capital availability and valuation trends. Debt to Ebitda levels are always low at the bottom of the market. Post credit-crunch they fell exactly in line with valuation multiples, one half turn. “Total debt to EBITDA was 4.0x in the first half of 2007, and has averaged about 3.5x since,” according to the report.