In 2005, U.S.-based buyout firms closed 845 buy-side transactions, deploying a disclosed $197.8 billion to make it happen. Sound at all familiar? If not, you should read the 2008 deal wrap-up story entitled “A Down Year For Deals Amid Debt Drought.” In it, you will see that U.S. buyout shops closed a total of 859 control-stake deals in 2008 for a disclosed value of $136.3 billion, figures that bare a striking resemblance to those of yesteryear.
There are, however, some significant differences: chief among then is the momentum of the market headed into each period.
At the close of 2005, deal flow for buyouts was the strongest it had ever been, with the wind of two previous record-breaking years at its back. In 2003, all previous records were broken as U.S. buyout shops disclosed spending more than $94 billion to close 538 deals, while 2004 saw them crush that accomplishment by putting a disclosed $136.5 billion to work to chalk up 752 buy-side transactions.
Last year, too, was preceded by two record-breaking years—2007 was the industry’s most robust year ever with U.S.-based general partners etching out 1,042 deals with a total disclosed value of $475 billion, while 2006 saw 999 deals close with disclosed valuations of $320 billion. But last year certainly didn’t do its part to keep the upswing intact.
The year 2005 also marked a time of increased sponsor-to-sponsor transactions as general partners realized more and more that their own brethren represented a lucrative exit market. At least 113 transactions (13 percent of the deals tracked), were sponsor-to-sponsor deals in 2005. With the market heading further and further into a trough throughout 2008, many LBO firms understandably felt uneasy selling portfolio companies at the bottom (or close to the bottom) of a cycle. Hence, sponsor-to-sponsor deals only represented 6 percent (53 deals) over the past 12 months.
So what positives, if any, can buyout pros look forward to when all the comparisons are so bleak? The answer for those in the middle market could be purchase price multiples. In 2005, the average company with less than $50 million of EBITDA sold for around 8.5x EBITDA, up from 7.2x EBITDA the year before, according to ratings agency Standard & Poor’s. In the first nine months of 2008, the average mid-market company sold at a multiple of about 8.4x EBITDA. If the current downturn follows the linear historic model, then 2009 will be the year of the 7x EBITDA purchase price multiple, and by 2012 mid-market GPs will be stealing portfolio companies at an average of only 5.9x EBITDA.