Hiter, you know a lot about the middle market from your work leading a leading middle market investment bank. How are the debt markets doing? Right now in the middle market it’s going quite well. Liquidity and the number of participants have increased steadily through the year. We’re having no problems with middle-market deals getting financed, and we think this will continue into 2011. Lenders have a fair amount of capital to get out. We’ve read how debt markets for bigger deals and small, private companies are at low supply, but in the middle market it’s at a solid level. It’s not back to where it was three years ago. But it doesn’t need to be. To have a thriving M&A market, you don’t need the debt market to be as extended as it was three years ago. You just need it to be vibrant and robust.
What sectors do you think will be particularly active in 2011? Health care. I would put energy and power in there. And technology. Keep in mind those three categories are not mutually exclusive. An energy company like a smart grid company has a tech bent to it, as do health care IT companies. There is an awful lot of crossover. I would add consumer to that. A lot of people think consumer and residential real estate is lagging, but the consumer world is a lot more stable than people are giving it credit. It’s a very stable part of the market right now. We are seeing a lot of consumer deals.
Are multiples back up from where they were during the crash? Multiples are surprisingly good. They’re not back to the level of three years ago but they’re not falling off. One of the dynamics of the cycle is that multiples didn’t drop. The volume of deals was very low and multiple measurement was difficult to [gauge]. Now that the market has picked up again, multiples have been very healthy again. Maybe half a turn from the top of cycle three years ago. One thing driving that is the pent-up demand and supply for deals from corporations and private equity groups. Corporations have statistically more cash than they’ve ever had in their history. Private equity groups also have more cash than they’ve ever had in their history…There’ s a whole lot of dry powder. On the supply side, if you were interested in selling in 2008 or 2009, you were probably hesitant. You probably held off. In 2010, we saw some of that pent-up demand and supply meeting each other and that’s keeping multiples at sustainable levels.
Can you give us some idea what the specific multiples are? Multiples really depend on the industry. Some at 7-8x while others are at 10-12x.
There were a lot dividend recaps this year. Will we see more in 2011? We’ll see some more. That will follow the same path of the general M&A market. With debt markets being good and strong, and the growth of these companies continuing to improve, if owners don’t want to sell their companies, then taking a dividend recap is a viable alternative.
Edited for clarity