To Invest Less Equity, Do Bigger Deals

Mid-market deals became more expensive in the second quarter, as both the purchase price multiples and the sponsor contributions increased, according to Standard & Poor’s Leveraged Commentary and Data.

The mid-market equity contribution hit 45.57 percent in the second quarter, topping the 45.56 percent contribution that sponsors paid in 2009 in the depths of the financial crisis. Indeed, that equity contribution was the highest in a data set that goes back to 1997, although LCD reports prior years’ results only on an annual basis, rather than quarterly as for the latest numbers.

That equity contribution was up from 39.8 percent in the first quarter and up from 42 percent in the second quarter of 2011 according to LCD, the loan monitoring unit of credit rating agency Standard & Poor’s Financial Services LLC. LCD defines the mid-market as companies with less than $50 million of EBITDA.

Purchase price multiples in the mid-market rose to 8.3x EBITDA, up from 7.3x EBITDA in the first quarter and nearly matching the 8.4x multiple from the second quarter last year.

In the second quarter, buyers were financing their mid-market deals with 3.77x EBITDA of senior debt and 3.85x of equity, LCD reported. The contribution of subordinated debt edged lower to 0.74x EBITDA.

Larger sponsors had an easier time completing their deals. LCD reported that larger company deals were pricing in the second quarter at 7.9x EBITDA for for companies with more than $50 million of EBITDA. Those deals included 4.77x EBITDA of senior debt and 2.99x EBITDA of equity, with 0.12x EBITDA of subordinated debt. Sponsor contributions declined to 35.9 percent of the purchase price multiple.

Overall in the second quarter, for all deals, the purchase price multiple was 8.0x EBITDA, including 4.65x EBITDA of senior debt and 3.10x of sponsor equity, with  0.19x subordinated debt, LCD reported. Sponsors contributed 37.1 percent to the  value of their deals in the form of equity, the service said.