‘Flood’ of mid-market deals expected in 2012

A spike in mid-market investment activity in Q1 2012 is expected to continue through year end, as strategic buyers increasingly compete for deals and financing sources ramp up lending efforts.

Private equity professionals are expecting a “flood of deal activity” in the mid-market this year, according to a new report from GF Data.

The 45 transactions completed in the first quarter of 2012 by a sample of mid-market firms marks a 35 percent increase compared to Q1 2011 and the strongest first quarter of deal volume since 2007.
“Three factors are combining to drive volume,” GF Data chief executive Andrew Greenberg told Private Equity International. “Unprecedented levels of cash in the hands of strategic and financial buyers, improving corporate performance and the widespread expectation of federal tax increases in 2013.”

While strategic buyers have historically been a popular source of exits for private equity firms, companies that have been conserving cash in the years following the economic crisis have recently emerged as potential buyers with large pools of capital.

“For private companies already in the hands of private equity groups, there’s no doubt that strategic buyers are more interested and able to supply an exit than ever before,” Greenberg said.

The availability of financing for deals has also contributed to the recent spike in mid-market activity that is expected to continue through the end of 2012.

“The mid-market banks, who like all banks were sort of paralysed for a couple years, are lending and they're getting more aggressive,” said Gerald Cromack, co-president of investment banking firm Morgan Joseph TriArtisan.

The strong environment for deals, however, is not limited to the mid-market, according to Cromack.

“It's a good time to be looking at transactions of any size,” he said. “The availability of borrowing has re-energized the private investing market considerably. Now that the market is back and people are buying and paying reasonable multiples, you're seeing a very large flow of portfolio sales in order to generate liquidity to return capital to the LPs because the LPs have been starved for the last couple years.”

In the mid-market, larger businesses continue to attract higher multiples than smaller companies, according to GF Data, due to a “size premium” that reached record levels in 2011. While valuations for companies with total enterprise value between $50 million and $250 million had an average EBITDA multiple of 7.8x, valuations for businesses in the $10 million to $50 million range reached an average of 5.6x, according to the report.

One firm that has been capitalising on the strong deal environment is Boston-based BV Investment Partners, which focuses on family and founder-owned businesses and has been active both on the acquisition and exit front in recent months. On Monday, the firm invested in healthcare-related information services company Health Information Designs, using capital from its $435 million seventh fund.

“Right now we’ve got a pretty good funnel of new potential investments,” principal at BV Matthew Kinsey told Private Equity International.

So far this year, the firm has sold communications and broadband services provider Vision Communications, medical information services company The Western Institutional Review Board and entertainment and communications business Harron Communications.

“When we’re in the market selling our businesses we’re seeing healthy appetite from buyers,” Kinsey said.

GF Data Resources collects data on mid-market private equity-backed deals with enterprise values between $10 million and $250 million. The company’s database includes information on 1,332 transactions closed between 1 January 2003 and 31 March 2012.