Deal Pricing Ticked Higher In Third Quarter

Purchase multiples edged fractionally higher in the third quarter, as sponsors paid more out of their own pockets. The rise was driven by inflation at the large end of the market.

The average purchase price for new portfolio companies edged up to 8.7x EBITDA, compared to 8.5x in the second quarter, as sponsors had to put up 3.9x equity, up from 3.7x, according to data provided by Standard & Poor’s Leveraged Commentary and Data. Equity constituted 45 percent of purchase prices, on average, up slightly from 44 percent in the second quarter.

Senior debt multiples were virtually unchanged at 4.4x EBITDA. But subordinated financing, such as mezzanine debt, contributed 0.35x of the capital structure, up from 0.31x in the second quarter.

For large buyouts, defined by S&P as deals involving targets with more than $50 million of EBITDA, third-quarter prices climbed half a turn to 9.1x from 8.5x in the second quarter, with sponsors putting up 4.1x equity compared to 3.6x, senior debt providing 4.6x compared to 4.5x, and subordinated debt contributing 0.32x up from 0.18x. Backers of large deals provided 45 percent equity for their deals, up from 42 percent in the second quarter.

But in the middle market, sponsors were coming out a full turn ahead of the second quarter, paying only 7.2x EBITDA, down from 8.5x in the second quarter, including 3.3x equity, down from 3.6x, 3.4x senior debt, down from 4.5x, and 0.5x subordinated debt, up from 0.18x. Middle market sponsors put up 46 percent equity for the capital structure of their deals, the same as in the second quarter.

Compared to the first half of the year, however, third-quarter equity contributions for all deals were down, at 3.7x versus 3.9x for the first two quarters, while senior debt was up, at 4.2x versus 3.9x.