Valuations dropped slightly but are still higher than average

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High valuations and abundant use of debt continued to mark completed deal activity in the first quarter of 2018, according to GF Data. Two hundred and eight private equity groups and other deal sponsors reported on 52 transactions closed in the quarter.

The overall average valuation mark for the quarter was 6.9x, a marked retreat from the torrid 8.0x average in the prior quarter.

At first blush, valuations in 2018 seem to have retreated to pre-2017 levels. However, we gravitate to the view that the random fall of completed deals in 4Q 2017 versus 1Q skewed artificially high in the first period and low in the second. Averaged together, the result is a continuation of already unprecedented aggregate valuations attained in the middle quarters of last year.

Since the start of 2017, buyout valuations have averaged 7.2x, with financial quality, size, and transaction type all leading to demonstrable premiums. Although not shown in the chart, in 1Q2018, the “quality premium”—the reward in valuation for above-average financial performance-was 21 percent.

Smoothing out the valuation spike and trough in the past two quarters, average equity contribution has remained 42 to 43%. Required equity share is highest on deals in the middle tiers of the GF Data universe, as buyers of smaller businesses benefit from more restrained valuations and buyers in the upper tiers benefit from unprecedented available debt.

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Editor's note: GF Data provides proprietary data on private equity-sponsored M&A transactions with enterprise values of $10 million to $250 million. GF Data defines the Quality Premium to include better financial performers (businesses with TTM EBITDA margins and revenue growth rates both above 10 percent, or one above 12 percent and the other metric at least 8 percent. Outliers on the high side are also excluded.) For more information on GF Data, please visit www.gfdata.com.

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