Based on PitchBook and aggregated survey data, average debt levels in 2Q were much higher for transactions with smaller companies than they were for their larger counterparts. In fact, businesses with enterprise values of up to $25 million averaged 53% in debt usage, while those with EVs exceeding $250 million saw a mean that was 5% lower.
Coupling that disparity with the increased prevalence of equity in 2Q, it’s clear that private equity fund managers are being more diligent as they grapple with elevated transaction prices in general. Yet, within certain segments of the market, general partners are more comfortable with tapping trusted lenders to employ greater amounts of debt, although they still tend to rely on more secured, senior debt.
At such size ranges, moreover, consortiums are not always necessary, thus enabling greater reliance on a given, established relationship with one lender, which in turn can facilitate greater debt usage, as both fund manager and lender know the other’s strategies and consequently act with greater confidence.
To edge into a more speculative realm, since deal multiples for smaller enterprises also rose in 2Q, higher debt usage could also be a factor in mitigating price increases with shrewder deal sourcing among companies that are able to carry heavier debt loads, or a reflection of greater confidence in and ease with certain financing products such as the unitranche.