Fund Managers

Signs of frothy market amid move to smaller deals

In the second day at a gathering for deal advisory firms, it became clear that more aggressive deal terms aren’t confined to companies with $10m to $50m of EBITDA.

By
Andrew Hedlund
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Increasing purchase price valuations and the competitive nature of debt financing are not limited to the traditional mid-market. The same circumstances apply among those companies that have less than $10 million in EBITDA, roundtable participants noted at the Alliance of Merger & Acquisition Advisors conference in Chicago.

Kelly Cornelis, a managing director at private equity firm LaSalle Capital, said that even for companies with EBITDA between $5 million to $8 million, purchase price multiples are increasing. Furthermore, Cornelis said her firm has been pushed to place bids in leveraged buyout transactions using future financial projections as the bidding baseline rather than financials from the last 12 months.

David Gezon, a senior managing director at Midwest Mezzanine Funds, an alternative lender that commits capital to companies with at least $3 million of EBITDA, noted that competition for deals has increased in his space, arguing that the massive influx of capital has not been limited to mid-market companies with $10 million to $50 million of EBITDA.

A third panelist said the quality of companies on the block have been poorer quality recently, though Cornelis disagreed with that characterisation. A fourth panelist noted that due diligence periods have been compressed because financial firms have been eager to close deals, sometimes tapping the subscription facilities many of their funds make use of.

These harbingers of a frothy marketplace tally with what many market sources continually tell PDI: namely, the ‘new normal’ of covenant-lite transactions, aggressive EBITDA addbacks and compressing credit spreads have turned the deal market into something akin to the Wild West.

The reality is evidenced in data PDI examined showing that a traditional covenant package, or those with three or four maintenance covenants, have all but faded from transactions done in the first half of the year. Meanwhile, covenant-loose deals, those with only leverage maintenance covenants, have made up the largest share of deals looked at.