Talking Deal Prices: Cyclicality shapes prices as pros mull economic strength

  • Recession-resistant targets drawing more interest
  • Landmark Partners, Advent portfolio companies shine in summer IPO crop
  • Private SaaS companies more affordable than their public brethren

Along with price and growth prospects, the cyclicality of businesses is factoring heavily into deal-making as private equity firms look toward 2017, an investment banker who works with sponsors said recently.

Against a cautious backdrop — the prospect of a recession — sectors perceived as more vulnerable to periodic weakness are less in favor.

Tech, healthcare and service companies command strong purchase prices, while mining, agriculture and energy-related companies — not so much.

The commodities cycle has been particularly unkind to oil and gas producers, which have pushed up the number of companies in the Standard & Poor’s Weakest Links report to a seven-year high. (See related story.)

Tom Lacy, managing director in investment banking at Robert W. Baird, said it’s not unusual for high-quality middle-market deals to sell for well into the double digits nowadays.

While GPs are skeptical of cyclical businesses, the overall environment remains “very competitive” because more buyers have emerged from PE, family offices and strategic bidders, he said.

Putting 2016 into the context of the past few years of deal-making, M&A activity got off the mat in 2009-2011 followed by roughly two years of price discovery in 2012 to 2014 as activity normalized.

“Nowadays, people know what things are worth,” Lacy said. “Risk and return expectations vary based on what they think will happen in the next downturn, contrasted with the growth forecast for the business.”

So while more buyers may be involved in private-market deal-making, they’re willing to pay up only for higher-quality companies seen as less vulnerable in a recession.

That could be one reason M&A activity has been less robust this year.  It may be a good time to try a contrarian play for a lower price, some analysts say. Or maybe just keep the dry powder dry until visibility improves, perhaps after this fall’s U.S. presidential election and possible interest rate increases from the U.S. Federal Reserve.

Sponsor-backed IPOs mostly rise after summertime debuts

Despite some choppiness in the stock market as the summer wrapped up this month, most PE-backed initial public offerings met success in public-market trading after pricing their shares.

Medspace Holdings, a clinical-research company majority-owned by Cinven, delivered a 31 percent gain as of Sept. 15, according to data compiled by (See performance chart of the last 100 IPOs.)

At Home Group, the retailer majority-owned by AEA Investors, has fallen 16 percent since its IPO. AEA also backed the IPO of GMS, a construction- products distributor that’s risen about 3 percent since its stock started trading.

Talend SA, the software company partly owned by Silver Lake, has risen about 52 percent in the public market.

Moelis Capital Partners backed the IPO of Kinsale Capital Group, an insurance provider, which has jumped 26 percent.

Landmark Partners, part-owner of TPI Composites, has seen the IPO of the maker of wind-turbine blades rally about 68 percent.

Patheon NV, a contract producer of medicine backed by JLL, is up about 32 percent.

Atkore International Group, a maker of cable and PVC conduits backed by Clayton, Dubilier & Rice, has gained about 12 percent. CD&R also teamed up with Kohlberg Kravis Roberts to back the IPO of US Foods, up 2.5 percent since its IPO.

Advent International backed the IPO of Cotiviti Holdings, a consumer-services company that has rallied 66 percent since its IPO.

Oaktree Capital Management, which owns about 57 percent of AdvancePierre Foods, has seen its stake grow in value by 22 percent.

Private SaaS companies valued at discount to public ones

With plans aired earlier in September by TPG Capital to buy a majority stake in Intel Corp’s computer-security business, McAfee, for $3.1 billion and Silver Lake-backed Dell Inc closing its $60 billion take-private of EMC, tech remains a big focus for private equity.

Deal makers shopping for acquisitions in the popular software-as-a-service category in tech may get better prices for private companies, however, rather than chasing publicly traded acquisition targets.

Currently, public SaaS companies are typically valued at about 6x revenue, according to the latest weighted-averaged SaaS Index compiled quarterly by Quest, a report from middle-market lender Golub Capital. That’s well above the private median multiple of about 4x revenue.

Valuations for both public and private SaaS companies fell from 2015 levels, however. This time last year, public SaaS companies traded at about 7x revenue, while privately held enterprises were valued at about 4.5x.

Peter Fair, managing director in Golub Capital’s Late Stage Lending Group, said the latest study marks the sixth since its launch in 2015 as a tool for chief financial officers and investors to view valuation trends in the SaaS space.

Overall, the lower valuations have helped Golub’s backlog because lenders prefer more solid fundamentals for borrowers.

“Compared to a year ago, our pipeline is a lot more robust,” Fair said. “Last year, frothy valuations diluted our value proposition.”

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Photo of Tom Lacy courtesy of Baird