The biggest headline in GF Data’s Q2 report shouldn’t come as a huge surprise: “Private equity buyers continued to tap the brakes in 2Q.” With rising interest rates, inflation on an upward trajectory, ongoing supply chain strains and geopolitical uncertainty, deal volume continued to trend downward in the second quarter of 2022.

GF Data’s quarterly report focuses on private M&A transactions valued from $10 to $250 million. The Q2 survey includes data from 264 private equity funds. Here are the key takeaways from the latest report:

• Deal volume has cooled from its blistering Covid-recovery fueled 2021 with 55 deals closed in Q2 2022, compared to 93 transactions in Q2 of last year, 74 in Q1 and the torrid pace set in Q4 2021 of 151.

• While volume is down, valuation multiples for high quality companies remained strong at 7.4X EBITDA — a return to pre-Covid levels (and higher in some cases for attractive assets).

• The “above average financials” category of companies being sold increased to 68% of transactions, up from 66% in 2021 — and a big jump from the “historic norm” of 57%. This indicates that marginally performing companies are not finding their way to the closing table.

• Larger transactions in the $250-$500 million range saw a significant reduction in multiples, from 12X last quarter to 8.9X this quarter. We hear that the syndicated loan market that funds these size deals has tightened significantly and may be part of the reason for the steep decline.

• Closed deals in 2021 included more seller financing or earnouts (SFEs) “valuation bridging mechanisms” vs those in previous years.

Why is Deal Volume Down?

Current economic challenges aside (including interest rates, inflation, supply chain issues …) one reason deals have been on a fairly steep decline in 2022 could be due to the megavolume of deals closed in Q4 2021. In other words, the industry could be taking a collective breather as new engagements begin to fill the pipeline.

What Does This Mean for Sellers?

If you’re thinking about putting your business on the market, now is a good time to polish things up. Are your financial reporting systems compliant (or mostly compliant) with Generally Accepted Accounting Principles (GAAP)? Is your plant and equipment in good working order, or is there some maintenance and repair needed? Are you collecting all sales taxes required by any states in which you do business? These areas can materially impact the value of your business, and could potentially keep a transaction from closing.

What is FourBridges Seeing?

We’ve got two transactions under Letter of Intent that are going through the closing process. Buyers seem excited about getting these deals over the finish line and we continue to get emails from private equity funds asking about the pipeline for new opportunities. There appears to still be “dry powder” for funds to invest, as indicated by Industrial Opportunity Partners, LLC (“IOP”) announcing the closing of its fourth fund, with $650 million of committed capital.

Recent Private Equity Transactions

Huron Capital completed the successful exit of Pueblo Mechanical & Controls, a provider of HVAC and plumbing installation, maintenance, retrofit and repair services to commercial and industrial customers. The new owner is the Ontario Municipal Employee Retirement System.

LFM Capital announced its investment in Construction Implements Depot, LLC, a leading manufacturer of attachments for use with skid steers, compact track loaders, compact tractors, and mini-excavators.

CORE Industrial Partners, a manufacturing, industrial technology, and industrial services-focused private equity firm, announced the acquisition of IDL Precision Machining, an engineering-focused manufacturer of highly complex precision components and assemblies primarily for the aerospace & defense end market, by CORE portfolio company Cadrex Manufacturing Solutions.