Market Updates
Middle Market M&A Activity Poised for Growth, Significant Competition for Quality Companies
2012 M&A Outlook is Bright
Middle market M&A activity continued to plod along at a modest pace in Q4 ‘11. As anticipated, Q4 ’11 middle market transaction volume declined 11.6% quarter-over-quarter. However, for the full-year 2011, middle market transaction volume increased 25.6% from the previous year. The M&A market has been negatively impacted by the uncertainty in the global economy that peaked in the beginning of the third quarter. This uncertainty caused buyers and sellers to increasingly sit on the sidelines, which impacted deal volumes during the second half of 2011. However, the lack of volume didn’t impact valuations as middle market transaction multiples increased 3.9% in Q4 ’11 from the previous quarter. Valuations remain robust as access to debt is abundant and purchasers are aggressively targeting quality companies in the market with stable historical performances and transparent backlogs. Uncertainty remains in the global economy, but several positive factors point to pent-up demand for M&A activity. Strategic buyers are flush with cash and the private equity community is poised to be active on both the buy- and sell-side. These market dynamics, combined with “baby boomer” private business owners with no succession plan, could lead to a white-hot M&A market if the economy shifts into drive.
Strong Year for Middle Market Lending
According to S&P, middle market loan volume for leveraged buyouts increased from $3.1 billion in 2010 to $5.0 billion in 2011, representing a healthy 61.6% year-over-year growth rate. Total middle market loan volume increased to $14.4 billion in 2011, or a 26.6% increase from 2010. The Q4 ’11 loan volume, down 41.1% from Q3 ’11, represents the third consecutive quarter-over-quarter decline. This decline is primarily attributable to the increase in middle market debt costs during the second half of 2011, which negatively impacted demand for debt refinancing. Total leverage/EBITDA in middle market LBO transactions increased from 4.6x in Q3 ’11 to 4.8x in Q4 ’11. The junior debt market continues to face competitive pressures as more and more business development companies enter the market. As a result, subordinated debt costs continue to decline and total leverage metrics remain robust. As senior debt/EBITDA levels decreased from 4.1x in Q3 ’11 to 3.7x in Q4 ’11, subordinated debt levels filled the gap, increasing from 0.5x to 1.1x over the same period.
Q4 Performance Points to Strong Outlook for 2012
Real gross domestic product accelerated at its fastest pace in a year and a half, growing 2.8% in the fourth quarter, and nonfarm payroll increased for the 15th consecutive period, bringing unemployment down to 8.5%. The number of housing starts, permits issued and completions in December have all increased compared to one year ago, signaling a potential recovery in the housing market for the coming year. Despite encouraging GDP and employment news, the economy remains volatile due the uncertainty surrounding the European sovereign debt crisis.
