Mid-market purchase price multiples rebounded sharply in the second quarter, to 7.9x EBITDA, according to Standard & Poor’s Leveraged Commentary and Data. Including fees and expenses, the total cost of doing LBOs was 8.4x EBITDA in the second quarter, the data showed.
Viewed another way, sponsor equity contribution was 42 percent of the purchase price in the second quarter, LCD reported. That meant that mid-market sponsors were contributing 3.8x EBITDA to do deals for companies earning less than $50 million, while the senior debt contribution increased to 4.1x, and subordinated debt covered the remaining 0.5x EBITDA, LCD data showed.
Both measures represent a return to pricing from the fourth quarter, a period of frantic dealmaking as sponsors sought to close transactions before capital gains tax rates had been set to rise, an increase that was averted by an 11th hour compromise in Washington, D.C. In the first quarter, when dealflow slumped, mid-market purchase price multiples fell to 6.5x EBITDA, with sponsors contributing only 33 percent of the price, or 2.4x EBITDA, LCD reported.
In the large-cap market, deals of $500 million or more, purchase price multiples rose to 8.8x in the second quarter, compared to 8.4x in the first period. Sponsor equity contributions rose to 35 percent of the total, representing 3.3x EBITDA, while senior debt covered 4.8x and sub debt and other forms of financing covering 0.6x EBITDA.
For all LBOs, purchase price multiples rose to 8.5x EBITDA, LCD reported. Adding on fees and expenses, the total price rose to 8.8x, compared to 7.8x in the first quarter. Sponsor equity contribution increased to 37 percent of the total, meaning that they paid 3.5x EBITDA, with senior debt covering 4.7x of the price, and sub debt and other forms of financing covering .06x EBITDA.
Investment bankers say they expect a busy second half. “With the aggressiveness of lenders and the aggressiveness of private equity firms for quality companies, it’s as hot as it was in 2007,” John Tilson, a managing director at Brown Gibbons Lang & Co., said at the Buyouts Chicago conference in late June.
And cash continues to flow into the market. In the week of July 6, yield-starved investors poured $658 million into high-yield funds, making that category the biggest gainer of any tracked by sister service Thomson Reuters Lipper, which tracks the mutual funds industry.
But as deal activity has stepped up, lenders seem to have maintained discipline. The high-yield bond market started strong in the second quarter, with issuance in May hitting an all- time monthly record of over $40 billion, according to Thomson Reuters LPC, which tracks the loan market. But that appetite vanished in June as concerns intensified around the sovereign debt crisis in Greece and other euro zone countries and broader macroeconomic turmoil.
The same thing occurred in the institutional loan market, with strong activity early in the second quarter tailing off as the period progressed, LPC said.