Q: How do you think the second half of 2014 is shaping up for deal-making in the U.S. middle market?
A: It looks to be shaping up to be a busy second half. There is not a lot of organic GDP growth right now. In this type of economy, big companies need to make acquisitions in order to grow or fill out a product or service offering. In terms of sellers, some of our clients, while generally optimistic about their growth prospects on a standalone basis, don’t want to miss the opportunity to sell their companies for a possible premium multiple while the market seems to be strong.
Buyers are incorporating significantly more debt for middle-market buyouts these days—the median debt-to-EBITDA multiple rose from 4.8x in ’12 to 6.4x in ’13. At the height of the buyout boom in 2006, that ratio topped out at 5.7x. Are buyers just taking advantage of the optimal credit conditions while they’re here? How far do you look into this?
I think you hit the nail on the head. While leveraged loan volume and debt multiples have steadily been on the rise since 2010, default rates have remained very low by historical standards. More and more lenders have entered the middle-market space and buyers are taking advantage of the ample supply of capital. Obviously, we know what happened last time ratios were this high…a few years later we saw default rates rise. Hopefully that won’t be the case this time around.