CapX Partners

We recently spoke with Stephen Burt, Managing Director, Duff & Phelps, on the topics of capital structures and deal trends.

CapX:  What are you noticing in the formation of capital and the deals that are getting done?

Burt:  There are several high-level themes that are converging. First, the private equity overhang is still over $300 billion dollars. That’s money that was raised in the 2007, 2008 timeframe and needs to be put to work. There is also $1.7 trillion in cash on the balance sheets of companies in the S&P 500. Lastly, institutional investors that have had difficulty obtaining yield from the market are funding loan pools to facilitate leverage transactions. These pools of capital are driving strong merger and acquisition activity…and very high prices for businesses.

CapX:  Let’s talk about these high prices. If you’re a business owner, should you be thinking about selling?

Burt: If you’re a middle market business owner thinking of exiting in the next 5 years, you should definitely be thinking about it…now. In the first half of the year people were confident about their business prospects; in the third quarter of the year, there’s been a pause as business slowed. Looking to 2014, businesses are more confident now about how their companies are going to perform, so it’s a good time to take advantage of that confidence.

CapX:  What about pricing?

Burt:  Middle market prices are going anywhere from 7-10x EBITDA with the median purchase price just under 9x. This is higher than 2005, 2006, or 2007.  The irony of this is if you look at the companies that are selling, the growth is relatively flat. And if you have a high growth company…it’s as robust as I’ve ever seen for bids on a good company.

CapX:  What are you seeing on the lending front?

Burt:  In 2013 the average amount of leverage has grown to 4.9x the company’s EBITDA. This equals the levels of 2007.

CapX:  So capital is readily available and businesses want low-cost debt or to sell. What makes it difficult to get deals done?

Burt:  A couple of things: first, the increase in the level of due diligence. People are willing to pay high prices but alongside this is an exponential increase in the level of due diligence.  Just looking under the hood has become more difficult.

Also, in today’s climate, it would be very difficult to buy it say 9.1 times EBITDA and sell at 12. It’s not possible to financial engineer return. You need to grow and improve businesses to get returns.

CapX:  Last words for our readers?

Burt:   It’s all about an abundance of capital chasing a few quality assets.

Stephen Burt joined Duff & Phelps in 1994. He is a managing director in the Chicago office and leader of the firm’s Mergers and Acquisitions (M&A) Advisory practice. Stephen has more than 17 years of middle-market M&A acquisition experience.

Prior to joining Duff & Phelps, Stephen was vice president at Harris Bank and provided corporate banking and advisory services to middle-market companies. He specializes in providing M&A services to buyers and sellers of private businesses or public companies divesting divisions and subsidiaries. Stephen also provides private placement and financial restructuring services to private and public companies. He has extensive experience in many industries, including manufacturing, consumer products, financial institutions, distribution and food and beverage.

Stephen holds an M.B.A. in finance from DePaul University and a B.S. in finance from Indiana University. He is a member of the board of directors of Regal-Beloit Corporation (NYSE RBC).