Concerns are rising as valuations reach levels we haven't seen since 2007
Valuations are at levels we haven’t seen since 2007 and concerns are rising about the sustainability of the market and the amount of leverage the middle market is taking on. We asked six senior bankers how this was changing the advice they gave potential sell-side clients as they think about an exit.
Paul Sperry, Sperry Mitchell
“There is no question that deal pricing is at, if not above, 2007 levels. And, there is also no question that lenders are really stretching on the larger deals, with leverage multiples growing every quarter.
Yet, though middle-market leveraged lending has certainly roared back since 2009, with lots of lenders and plenty of money, we have not witnessed the same magnitude of stretching on cash flow multiples as in the large deal sector of the market. Indeed, The middle-market lending multiples seem to have remained somewhat constant at an average of 4-6X cash flow.
Basically, the bulk of the increase in middle-market deal pricing is coming from more equity as a percentage of the capital structure, as opposed to more debt.
Of course, even at 4-6X total debt, a company can quickly get into trouble with a sudden downdraft in earnings. Any amount of leverage adds risk to a deal, and we always make certain that our sell-side clients are well aware of the potential impact of capital structure on the future of their companies. However, to the question at hand, we do not see today’s PE-sponsored leveraged deals as particularly more risky than they were 3-5 years ago, despite the significant increase in pricing.”
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