Midway through 2016, deal multiples in private equity and merger and acquisition (M&A) transactions in the U.S. have climbed almost a full turn higher than the levels seen in 2015, sitting at 11.3x (EV/EBITDA*). This is further evidence of a frothy environment and the continuation of the valuation increases we have seen over the last several years. Of note, the debt ratios and debt-to-equity mix used to fund M&A transactions have started to tick downward in spite of the higher deal multiples, 5.5x (Debt/EBITDA) and 49% (Debt/EV) in 2016 compared with 5.8x and 56% in 2015.
Transaction sponsors are likely concerned about the ability of companies to service ever-increasing debt levels, to say nothing of the challenges in securing additional financing for transactions. In response, sponsors are using more equity to fund deals. Both of these factors may be signaling that the post-financial crisis boom in leveraged buyouts may be starting to lose steam. Highly-levered companies and lenders who issued inexpensive covenant-lite loans could come under pressure. High valuations and elevated debt levels will continue to be a headwind for traditional buyout managers looking to put capital to work. On the flip side, such an environment can create opportunities for those with expertise in restructuring. The market is anticipating this turn as evidenced in the fundraising market that saw more capital raised in distressed strategies in the first half of 2016 than in all of 2015.Key Takeaway:
As the credit and M&A cycles enter their later innings, it will create opportunity for those with dry powder and expertise to restructure/re-price those transactions completed over the last several years, which were built on lofty valuations and structured with aggressive amounts of debt.*EV- Enterprise Value
EBIDA – Earnings before interest, tax, depreciation and amortization
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.