You would have to be completely unplugged from the media if you have not seen multiple headlines over the past few years profiling mergers and acquisition activity at record levels and record valuations. According to the Institute for Mergers, Acquisitions and Alliances, United States M&A volume as measured by transaction value was over $1.9 Trillion in 2018 up from almost $1.8 Trillion in 2017. Year to date through May, 2019 there was approximately $800 Billion in transaction value. 2018 Middle-market M&A volume in the U.S. hit $427.9 Billion up from $372.7 Billion in 2017.
Valuations are experiencing record levels as well. U.S. private equity backed buyouts were executed at an average EBITDA multiple of 11.6x in 2018, down a bit from the 11.9x multiple in 2017, but still above the average post-financial crisis multiple of 9.9x (2010 – 2016).
Unprecedented liquidity is driving all this activity. A few anecdotes:
- Private capital dry powder is approximately $2 Trillion;
- Private debt funds (non-bank, private lenders) have over $300 Billion of dry powder; and,
- Corporate America is holding almost $1.7 Trillion of cash.
Working with middle-market companies, our investment banking teams at Evergreen Advisors Capital are consistently interfacing with private equity and strategic buyers and our activity levels and outcomes are reinforcing the statistics and anecdotal evidence – It is a great time to be a seller. Across several industries such as business services, software, healthcare, cyber, government contractors, and diversified industrials, we are seeing strong, consistent interest in our sell-side mandates from both financial and strategic buyers. That being said, it is not a one size fits all market. To ensure success and best manage time and resources, entrepreneurs considering liquidity alternatives need to access and evaluate the appropriate audiences for their particular fact pattern.
Scale continues to be a factor in generating interest from strategic buyers. During more than one sell-side engagement, we have seen potential strategic buyers show initial interest in a target only to back away when a higher priority (i.e. larger target) opportunity became available. Even though we found other buyers, the message has been clear that corporate America’s human resources are constrained when it comes to M&A causing transaction timelines to stretch a bit. We have been successful in guiding middle-market companies that may be sub-scale to larger strategic buyers, in generating interest from smaller strategic buyers that are backed by private equity. In almost all of these PE-backed strategic transactions, we encountered a counterparty that was able to act quickly and decisively, generating a great outcome for our client.
Another observation from our experience over the last several deals is that private equity firms are willing to embrace more creative transactions to better compete with strategic buyers. The simultaneous merger and recapitalization, where a subscale company proposes to acquire another company with the combined entities then attracting a private equity buyer that would not consider the two companies on a standalone basis, is a great example. These types of transactions can address issues of not only scale but also customer concentration – an issue that often afflicts middle-market companies and impacts valuation and market interest.
As mentioned earlier, the growth and scale of private debt funds are enabling owners to partially cash out without incurring equity dilution. Debt financed management buyouts and dividend distributions are becoming more available to lower middle-market companies now that these cash flow oriented non-bank lenders are willing to undertake transactions that traditional lenders have historically declined due to operating history, scale, credit profile or all of the above.
It is a special time in the market to take advantage of all the converging factors fueling liquidity. Having a guide that has a broad enough lens of the appropriate markets and the relationships to generate actions are key to a successful outcome.
Call us to discuss. 410.997.6000 or 571.406.5230
About Evergreen Advisors Capital
Evergreen Advisors Capital, LLC is a leading investment banking and corporate advisory firm focused on assisting emerging growth and middle-market companies in the areas of corporate finance, growth and exit strategies, valuations and advisory services. For more information, visit www.evergreenadvisorsllc.com/
Securities transactions conducted through Evergreen Advisors Capital/Member FINRA/SIPC.
