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Private equity-backed, lower middle market deal volume rose in contrast to a small decline in total transaction volume for companies of the same size during the second quarter of 2014. According to GF Data's analysis of transactions between $10 and $250 million of enterprise value, private equity transaction volume increased by 20% and the average multiple paid by financial sponsors was 6.4x EBITDA in the second quarter, up slightly from 6.3x the prior period. However, transaction multiples were bifurcated during the second quarter; transactions between $25 and $100 million in enterprise value experienced a noticeable decline in multiples against an increase for larger and smaller transactions.

S&P Capitol IQ recorded o fall of 1% for aggregate transaction volume during the quarter for the middle market, demonstrating the robust financial war chest of private equity. However, we're seeing that certain sectors such as Industrials, Engineering, and Manufacturing are on pace to repeat 201 2's M&A activity in volume and transaction value.

Healthy Credit Environment

With an abundance of institutional capitol looking for yield, credit markets remain healthy. According to Thomson Reuters' "Leveraged Loan Monthly," new middle market loan interest rates remained below 6% in the second quarter, keeping debt an attractive option for financing growth, investment, or liquidity events. Financial sponsors are taking advantage of low rates through leveraged liquidity events to help boost returns. Of the $262 billion in year-to-date leveraged loan issuance by sponsors, 77% is composed of non- buyout activity. According to Pitchbook Data, $486 billion of dry powder remains accessible to private equity funds as loose credit markets allow for reduced equity contributions for acquisitions and add-ons.

With more equity available per transaction, private equity bids are more competitive with strategic acquirers. Greater leverage results in equity contributions that have frequently fallen below 40% for leveraged acquisitions.

Increased "covenant lite" loan issuance has contributed to a surge in leveraged M&A activity by companies and private equity. This flexibility has also been extended to non-M&A transactions as well, with refinancing comprising one third of "covenant lite" issuance in July. Debt-to- EBITDA multiples are averaging 5.44x through the first seven months of 2014, representing nearly 10% greater leverage than in 2013.

Size Matters

As is generally the case, larger private equity platform buyouts command a premium multiple on EBITDA compared to smaller platform acquisitions. Through the first half of 2014, that spread has widened to its recent historical high, with $10 million to $50 million enterprise value buyouts averaging 5.4x EBITDA compared to 7.6x for sellers with an enterprise value in the $50 million to $250 million range.

A stark contrast to 2013, the 2.2x EBITDA spread surpassed the previous modern high point of 2011 and extended to non- M&A transactions as well, with refinancing comprising one third of "covenant lite" issuance in July. Debt-to-EBITDA multiples are averaging 5.44x through the first seven months of 2014, representing nearly 10% greater leverage than in 2013.

We continue to witness strong demand for companies with healthy margins, growth potential, and a convincing value proposition. Proper marketing and positioning maximizes shareholder value, whether that is a higher valuation for a sale or a lower cost of capitol for an ongoing business. The Midwest remains active and on attractive place for institutional capitol.

An experienced transaction advisor can maximize the value of your business through thoughtful preparation, obtaining confidential, pre-marketing feedback, and preemptively addressing issues that might reduce buyer demand. In addition, an advisor possesses the connections and network to raise new capitol, recapitalize your balance sheet, or advise on liquidity options. To review your options or get a more in-depth market analysis, contact an experienced advisor.

Footnote:

Middle-Market Definitions: GF Data ($10 million-$250 million), Pitchbook ($10 million-$1 billion), S&P Capital IQ ($10 million-$250 million) Thomas Reuters LPC ($10 million-$500 million)

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