Banker sees typical middle-market leverage near 6x EBITDA

A senior investment banker at Robert W. Baird & Co said competition for deals continues to support robust purchase price and leverage multiples in 2015, with middle-market firms enjoying more borrowing flexibility on their acquisitions compared to mega-deals.

While the U.S. Federal Reserve has been trying to keep watch on larger deals of more than 6x EBITDA of leverage, middle-market firms have bit more leeway, because they’re small enough to avoid concerns about threatening the financial system.

For Baird’s deals, which typically range from $100 million to $1 billion, “you’re seeing leverage levels comfortable at 6x EBITDA and in many cases above six,” said Brian McDonagh, co-head of global investment banking and M&A at Baird.

Private equity firms may pay double-digit purchase price multiples, or even up to the teens in some industries, and high-single-digits for others, depending on the sector.

Industrywide, average purchase price multiples for LBOs came in at 9.2x EBITDA in the fourth quarter, about flat with 9.3x EBITDA in the year-ago quarter, according to S&P Capital IQ. Average leverage levels climbed to 5.5x EBITDA from 5.1x EBITDA.

Overall, leverage on deals continues to increase, but the financing market remains very favorable, McDonagh said.

“People ask what would be the first domino to fall in terms of changing the M&A and equity market conditions. It would have to do with the financing market,” he said.

Dealmakers are keeping an eye out for any possible dislocation caused by moves by central banks in the United States and abroad or a geopolitical problem that could roil financial markets. Overall, Baird remains cautiously optimistic and it continues to see favorable conditions in the debt market, McDonagh said.

Deals for technology, tech-enabled services, industrial, healthcare and consumer businesses remain in strong demand, McDonagh said.

“Buyers know they’ll have to pay the highest price, but we’re also seeing the most aggressive buyers also compete on contract terms,” he said. “In addition to paying high prices, the most savvy and successful buyers are also ‘competing on process.’ (That) means providing sellers with very aggressive contract terms, moving quickly and offering a high degree of certainty, and competing for the hearts and minds of management teams and offering a good home for the business.”

With the recent decline in oil prices, the energy sector remains quiet on the deal front. “A lot of folks are taking a pause to assess the conditions,” McDonagh said. “Folks are trying to figure out what $45-a-barrel oil means. They’re trying to figure out if that’s the new normal.”

Baird will continue to hire bankers as the bank’s M&A backlog grew by 35 percent at the start of the year, but McDonagh didn’t offer any specific headcount goals.

Photo of Brian McDonagh courtesy of Robert W. Baird & Co