Middle-market deal activity in the United States recovered in 2013 after getting off to a less-than-stellar start in the first half of last year. As we detail in our upcoming 1H 2014 U.S. PE Middle Market Report, to be released online Wednesday and at ACG InterGrowth on Monday, deal activity picked up in the second half of 2013. All told, last year recorded declines in deal flow and total capital invested from 2012 levels, but was still in line with figures from the previous three years.
The resiliency in deal flow last year is notable, given the major jump in valuations for middle-market companies recently. The median valuation-to-EBITDA multiple ballooned from 8.4x in 2012 to 10.5x last year, largely driven by an increase in leverage made available for middle-market deals, defined by PitchBook as transactions valued between $25 million and $1 billion. PE firms have taken advantage of looser credit markets; the median debt percentage for middle-market deals increased last year to 61.5%, a level not seen since the run-up to the financial crisis. The median debt-to-EBITDA multiple for middle-market buyouts grew to 6.4x in 2013, a sizable pop from 4.8x in 2012.
Heady valuations made for headaches on the deal-making side, but less anguish on the exits front. Buoyant stock markets produced a 43% increase in IPOs for middle-market companies last year. The allure of the public markets propelled sell-side firms away from corporate suitors and buy-side PE investors, both of which bought fewer PE-backed companies in 2013 than the previous year. In all, PE sellers offloaded 537 investments last year, collecting $63 billion in the process. Both figures were down a notch from 2012 levels, but solidly in line with exit figures since 2010.
For their efforts, PE firms continue to be rewarded by limited partners on the fundraising trail. A total 156 vehicles closed on $111 billion in commitments in 2013, continuing the momentum from 2012 ($112 billion across 139 funds). Going back further, the 156 funds that closed last year represented a 56% increase over 2010. In addition, the average time to close middle-market buyout funds has dropped precipitously since 2010 (from 17.7 months to 10.1 months).
We also found a visible increase in deal flow and capital invested in the upper-middle-market segment, largely due to strong demand in the B2C and energy industries. The lower middle market didn’t fare as well. Post-crisis, investors have pivoted back toward the upper end of the middle market, in part thanks to more credit available for buyouts. Last year was a high-water mark in the percentage of middle-market deals done for between $500 million and $1 billion (18% of overall deal activity, the largest percentage on record).
PitchBook’s 1H 2014 U.S. PE Middle Market Report, sponsored by PwC and co-sponsored by Madison Capital Funding, will be available in print at ACG InterGrowth in Las Vegas starting April 28, and will be available on Wednesday, April 30, in PitchBook’s reports library and in the PitchBook Newsletter.
The new report includes many additional details on regional activity, industry trends, middle-market segments, capital overhang numbers and the always popular league tables.