Let the Good Times Roll
To say the third quarter was strong would be an understatement. With valuations and leverage levels at nearly all-time highs, it is clearly a seller’s market in the middle and lower-middle markets. In fact, according to Pitchbook, valuations reached their highest level on record during the quarter. These observations beg the question, “What’s driving the markets, and how long will it last?”
As everyone knows, financial and economic markets are cyclical. So the biggest question clients ask is, “What inning are we in?” There’s no way of knowing what inning it is, but we can suggest that we are in the second half. Economic cycles are typically 7-10 years, and depending on how one measures it, we are seven years into the current cycle.
Sr. Debt/EBITDA lending ratios remain strong, and we are seven years into the current cycle.
In terms of what’s driving the high valuations, yes, general macroeconomic conditions are, for the most part, favorable. Growth is good, inflation is low, and unemployment has dropped to favorable levels.
Unemployment and inflation are at favorable levels.
All these factors are contrasted against the backdrop of a continuing low interest rate environment. Yes, the Fed has been raising rates, but they continue to be low by historical standards, and debt spreads are also low, which makes borrowing costs attractive for companies and investors alike. In other words, growth is cheap, and leveraged buyout (LBO) models “sing.”
Supply and demand play a role in this historically high valuation environment.
Also, playing a role in the historically high valuation environment are supply and demand – the supply of attractive LBO candidates and the demand by private equity funds. However, demand does not come just from LBO firms, but also from newly aggressive family offices and highly valued strategic players as well.
Transaction volume remains strong through 3Q and into 4Q.
Our final observation is a bit more anecdotal. To be sure, buyers are willing to pay all-time-high multiples. But in return, buyers are demanding a relatively high standard of due diligence. Quality-of-earnings reports, once reserved for only very large targets or ones with complex financial reporting, are now fairly commonplace, even in the middle market.
For now, the good times are indeed rolling. (Not quite to the degree of cryptocurrencies, but we’ll save that discussion for another day.) Valuations are at nearly all-time highs. Leverage levels are back to almost 2007 levels. If you have a business you’ve considered selling, now is a great time to go to market. The current environment and outlook are both good, and you would not want to miss the right opportunity.
With all the current dynamics, it is more important than ever for sellers to be prepared when going to market. WCF stands ready to help maximize value for your business.