pe deal multiples + trends · first half 2015 highlights patrick f. mcauliffe group head –...

PE DEAL MULTIPLES + TRENDSR E P O R T

G L O B A L

3Q 2015

DEBT LEVELSSTAY LOW

Page 8

FEES & CLOSING TIMES

Page 9

MULTIPLESREMAIN HIGH Page 5

C O - S P O N S O R E D B Y

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Mark R. du Four Group Head – Capital Markets

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Eric W. Barton Director


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CONTENTSIntroduction

Investment Multiples

Revenue Change

Debt & Equity Levels

Fees & Closing Times

4

5

7

8

9

COPYRIGHT © 2015 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.

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3 PITCHBOOK 3Q 2015 GLOBAL

PE DEAL MULTIPLES & TRENDS

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IntroductionMany core fundamentals of the private equity dealmaking environment have remained

unchanged for some time now. High valuations have persisted throughout the year, remaining a primary concern for buyers. Even if volatility in public markets has led to ripples of uncertainty and a decrease in public stocks, how much that will relieve private asset prices still remains to be seen. As regulations tighten, median debt usage remains low, however, even given the size of price tags. That speaks to the level of scrutiny concerning leverage multiples PE firms and lenders remain under, with memories of the financial crisis still potent. It’s worth pointing out that equity proportions have been declining for several quarters now, due in part to sustained high prices. Already having dialed back activity by count in 2Q, general partners are wary of putting too much capital to work chasing inflated valuations.

Potentially depressed returns aren’t the only cause for concern on the buy side; to look at the broader scene, commodity prices remain depressed and

global trade volume is down. The strength of the dollar also has sparked worry, especially among PE firms looking to expand larger holdings globally.

To provide a clear overview of the complex PE dealmaking environment nowadays, we’ve not only delved deep into the PitchBook Platform for deal metrics, but also surveyed dozens of investment professionals worldwide for their takes. This edition of our PE Deal Multiples & Trends Report includes more responses than ever before, building substantially on our historical survey data. Combined with our proprietary data, our respondents help shed light on many of these issues. What are PE buyers anticipating in terms of revenue? How healthy are the metrics of the companies PE firms are targeting? What’s the balance of equity to debt in a typical deal? The following pages explore those questions, among many others. We hope you find them useful and informative. If you are interested in participating in future editions of the deal terms survey, please contact us at [email protected].

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Investment MultiplesMedian EV/EBITDA Multiples by Enterprise Value

Median EV/Revenue Multiple by Enterprise Value

EV/EBITDA Multiple Breakdown

EV/Revenue Multiple Breakdown

After two quarters of EV/EBITDA multiples of 5x or more either exceeding or approaching 80%

of deals, 2Q 2015 saw temporary relief, although the proportion of multiples exceeding 7.5x stayed steady. Coupling that with the uptick in median EV/EBITDA multiples in the $250 million+ bucket, it’s likely price inflation in the upper middle market is growing, especially given the popularity of the middle market as of late. Overall, EV/EBITDA multiples seem to have

Source: PitchBook

Source: PitchBook

Source: PitchBook

Source: PitchBook

declined from 1Q, but that could be a result of EVs expanding and consequently pricing into different size buckets. Between 1Q and 2Q, median EV/revenue multiples surged across the board, supporting that inference. That increase led to the biggest percentage of EV/revenue multiples exceeding 2x yet recorded in this report series—over 40%. With dry powder ample and strategic competition strong, valuations may well stay within that lofty range for some time.

Investment Multiples Definition

Investment multiples are calculated by dividing the enterprise value of the portfolio company by either the TTM EBITDA or the TTM revenue at the time of the transaction.

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015

All $0-$25M $25M-$250M $250M+ 0%

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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 20150x-0.5x 0.5x-1x 1x-1.5x 1.5x-2x >2x

0%

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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015<0x 0x-2.5x 2.5x-5x 5x-7.5x >7.5x

0x

2x

4x

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8x

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12x

14x

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015

All $0-$25M $25M-$250M $250M+



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Revenue Change

PE firms continued to target companies with fairly healthy fundamentals in 2Q, shown by the

proportion of targets with unchanged or increased revenues in the year prior to the deal approaching 90%. As dealmakers looked forward, optimism by and large prevailed, with close to 80% of respondents anticipating an increase in revenue and nearly half predicting a surge of over 10%. That being said, in the last three quarters there has been a small but significant proportion of

Revenue Change 12 Months Prior to DealAnticipated Revenue Change 12 Months Following Deal

Source: PitchBookSource: PitchBook

EV/Revenue Multiple by TTM Revenue Change (2013-2Q 2015)

respondents forecasting no change in revenues for the year following a deal. A small but still larger percentage than we've seen since 2012 predicted a decrease in revenues. Stagnant growth and ongoing depressed oil and other commodity prices, not to mention widespread volatility, are likely contributing to this surge of caution. GPs are guarded, wary of fluctuating economic indicators, yet still confident in their operational expertise.

EV/Revenue Multiple by Anticipated NTM Revenue Change (2013-2Q 2015)


The charts above show the average and median EV/revenue multiples based on the company’s revenue change over the 12 months prior to acquisition and the investor’s expectation for the company’s revenue change in the 12 months following acquisition.

0%10%20%30%40%50%60%70%80%90%

100%

3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015

Decreased > 10% Decreased < 10% UnchangedIncreased < 10% Increased > 10%

0%10%20%30%40%50%60%70%80%90%

100%

3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015

Decreased > 10% Decreased < 10% UnchangedIncreased < 10% Increased > 10%

0.9x

1.3x

1.0x

1.0x

3.1x

1.0x

Decreased

Flat

Increased

Average Median

1.1x

1.0x

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2.3x

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2.8x

Decrease

Flat

Increase

Average

Median




Debt & Equity Levels

At 52%, median debt usage in 2Q marked the third consecutive quarter debt levels stayed

quite low compared to 2013 and 2014. Regulatory scrutiny has helped keep leverage down, especially as banks have increasingly shyed away from such risk. Even though nonbank lenders such as BDCs are filling the gap and money remains cheap, PE investors are deploying debt cautiously. Equity and senior debt still make up close to 80% of the average deal amount—even if that is on the lower end of what

we’ve seen, it still speaks to moderation. Dealmakers have been particularly moderate with regard to employing equity. The proportion of equity used has been waning for some time now, likely due to buyers’ reluctance to overpay and depress potential returns. In light of the Fed’s decision to leave interest rates unchanged, the flow of inexpensive financing will persist for a little while longer, so there could be an uptick in investors tapping debt markets, but caution is likely to reign still.

Median Debt Levels Median Debt Levels by Enterprise Value (2012-2Q ’15)


Average Debt-to-Equity Breakdown

Note: PitchBook receives varying levels of detail regarding the debt used in deals. Some of the charts on this page utilize a subset of our data that contains additional details. In addition, some charts are displaying median debt levels while others show average debt levels. This explains any discrepancies that may be noticed between the charts.

Source: PitchBook

50%

55%

50%

57%

60%59%

56%

62%

55%

61%

57%

52%

50%

52%

45%

50%

55%

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65%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015

56% 55%

52%

59%

45%

50%

55%

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65%

All $0-$25M $25M-$250M $250M+

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1Q

3Q

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1Q

3Q

1Q

2012

2013

2014

2015

Equity Senior Debt Non-Senior Debt

2Q

4Q

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4Q

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2Q

2Q




Fees & Closing TimesIn light of the ongoing industry-wide conversation around current fee practices, the uptick in the

number of transactions with fees in 2Q would seem to bely any concerns. From 1Q 2015 to 2Q, the proportion of deals with fees increased by 8%—up from 54%—but the resulting 62% is still considerably below what was common for much of 2012. As the overall trend is still downward and actual fee levels remain low, the quarterly bump is unlikely to indicate much of a shift. Median transaction fees as a percentage of deal size did increase, but remained in the middle of the dataset, while the proportion of monitoring fees to EBITDA stood steady

at 3.0%. Fee proportions are by and large plateauing for now, not seeming to decline further; the ongoing debate around fees have yet to exert an effect upon the numbers.

The increase in the size of transaction fees does align with the overall trend of deals taking longer to close. 1Q saw close to 90% of deals taking 10 weeks or longer to close. A return to historical norms was likely, hence the decline from that 90% in 1Q to just over 70% in 2Q. Hypothesizing from a single quarter’s numbers is risky. The overall trend of deals taking longer to close, due in part to heightened due diligence given elevated valuations, still seems to persist across the market.

Median Monitoring Fee as a % of EBITDA

Source: PitchBook

Source: PitchBook

Percent of Transactions with Deal Fees Transactions (count) by Weeks to Close

Source: PitchBook

Source: PitchBook

Median Transaction Fee as a % of Deal Value

3.4%

2.0%

3.0%

2.0%

2.8%

2.0%

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2.0% 2.0%2.3%

1.5%

2.0% 2.0%

2.5%

0%

1%

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3%

4%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015

3.5%4.0%

3.0%

5.0% 5.0% 5.0%

3.3% 3.5%

4.2%4.5%

4.0%

3.0% 3.0% 3.0%

0%

1%

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3%

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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015

0%

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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015

Transaction Fees Monitoring Fees0%

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1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2012 2013 2014 2015

<5 wks 5-9 wks 10-14 wks 15-20 wks >20 wks



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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Limited Partners Name (2,716)# Limited Partner Type # Affiliated Funds

# Affiliated Investors AUM Private

EquityPrivate Equity (%) HQ Location HQ Ph

1

2

3

4

5

6

7

8

9

10

11

12

13

New York State Common Retirement Fund

Pennsylvania State Employee’s Retirement S...Pennsylvania Public School Employee Retire...

Bell Atlantic Master Trust

Teachers Insurance and Annuity Assocation...

Massachusetts Pendon Reserves Investment...

Metropolitan Life Insurance

New York State Teachers Retirement System

Metlife Insurance Company of ConnecticutMassachusetts Mutual Life Insurance Company

China Insurance Company

Public Pension Fund

Public Pension Fund

Public Pension Fund

Corporate Pension

Insurance Company

Public Pension Fund

Insurance CompanyPublic Pension Fund

Insurance Company

Insurance Company

Public Pension Fund

594502

348333

328313

312308

304

274373

312192

158157

169136

185126

212

163147

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176,200.00

25,900.00

50,500.00103.35

178.50

59,700.00

516,206.00104,300.00

405,900.00

24,700.00181,980.00

13,919.80

25,900.00

8,040.00103.35

178.50

5,916.00

516,206.007,800.00

405,900.00

24,700.0018,371.00

8%

12%22%17%

42%

12%

7%8%

4.5%

7.3%10%

Albany, NY

Harrisburg, PA

Harrisburg, PA

Basking Ridge, NJ

New York, NY

Boston, MA

New York, NYAlbany, NY

Bloomfield, Ct

Springfield, MA

Quebec, Canada

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New York State Teachers Retirement System Public Pension Fund 308 126 104,300.00 7,800.00 8% Albany, NY

Bell Atlantic Master Trust Corporate Pension 333 157 103.35 103.35 17% Basking Ridge, NJ

Katzen Eye Group Goes Varsity

Energy

VCs Doing Better Than Ever

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European Activity Highlights

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Brightside Acquisition AnaCap’d

2010 Vintage Buyout Funds

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Meritech Closes $500M Fund

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