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• According to GF Data, Q3 saw a 21.4 percent increase in private equity deal activity from the previous quarter
• Q3 saw the highest average valuations since Q2 2009, with 6.4x Trailing Twelve Months (TTM) adjusted EBITDA
• Valuations continue to be dependent on deal size, with larger businesses receiving higher multiples
• Health care services, business services and manufacturing are among the industries with the highest YTD multiples

                                              Average Mulitples and Deal Volume

Private equity activity reports from Q3 were more positive across the board compared to the lull experienced in Q2. This is not surprising, as Q2 was heavily affected by the summer’s economic and political events. Additionally, Q2 private equity activity was still in a “cooling-off” period following a very active Q4 2010.

Deal Activity Picks up in Q3

According to GF Data, which tracks the deal activity of 166 private equity firms, Q3 experienced a modest jump in private equity transactions. In Q3, 34 deals were reported for companies with $10 to $250 million in Total Enterprise Value (TEV), a measurement of valuation that is calculated by adding a company’s equity value to its funded debt. This is compared to 28 deals reported in the previous quarter in the same TEV range. However, the Q3 total represents a decrease in activity compared to the 46 deals reported in Q3 2010. This drop is part of the continued aftermath of the various economic and political events that took place during the summer, which have contributed to uncertainties both at home and abroad.

Valuations Dependent upon Deal Class Size

Overall valuations for the quarter were an average of 6.4x TTM adjusted EBITDA. This represents the highest average since Q2 2009, a sluggish quarter in which only 16 deals were reported.  In contrast, the 34 deals completed in Q3 of this year indicates that private equity activity is no longer limited to high-quality deals, as it was in 2009.  Also in Q3, larger deal sizes garnered higher multiples, a trend that has been ongoing throughout 2011. The aggregate multiple for 2011 YTD is 6.1x; however, deals in the $10 to $25 million TEV range have averaged 5.3x, while deals in the $100 to $250 million TEV range have averaged 7.2x.

Debt Levels Remain Consistent

Total debt for Q3 averaged 3.1x and senior debt averaged 2.2x. Both numbers are consistent with levels for the past five quarters. Again, discrepancies were reported based upon deal size. At $10 to $25 million, total debt averages were 2.9x, compared to 4.7x in the $100 to $250 million range.

On the Horizon

According to PitchBook, a private equity research firm, the outlook for 2012 appears positive, and an increase in deal activity is anticipated. The likelihood of an upswing is bolstered by the $436 billion of investable capital currently on the sidelines and a 5,900 company inventory – i.e., the number of companies waiting to be sold by private equity firms. Additionally, deal activity in Q3 was widespread and unconstrained by deal class sizes, industries or geographic locations. In spite of a challenged economy, these trends underscore – and have contributed to – a building momentum in activity, which should provide a strong foundation for the beginning of 2012.