The Federal Reserve has continued its aggressive monetary policy tightening by increasing the federal funds rate again in November, adding 75 basis points to a target of 3.75-4.00. The Fed anticipates ongoing interest rate increases that are “sufficiently restrictive” to revert inflation to historical levels of 2 percent as it monitors conditions to assess the future magnitude of rate increases.
From an M&A perspective, an aggressively increasing interest rate environment has strengthened headwinds in an already gusty market. Interest rates, compared to the last several years, have become a greater challenge for transaction financing. Private equity groups in particular now face higher borrowing costs on buyout transactions. From a structuring standpoint, private equity groups have countered by increasing the portion of equity placed into deals to better manage the cost of debt. According to PitchBook, as of September 30, 2022, disclosed U.S. private equity transactions with valuations ranging from $25 million to $100 million and $100 million to $500 million had to place some 65 percent and 45 percent of equity-to-debt into transactions, respectively, which is 5 percent to 10 percent higher than the level placed in 2021. From MelCap Partner’s perspective in the middle-market, we have closed transactions with private equity groups structuring deals with upwards of 50 percent of equity-to-debt given the increasing interest rate environment.
The private equity market continues to display a flight to quality for top-tier businesses because of the historic levels of capital, including pent-up dry powder (known as private equity overhang) and committed fund requirements. As of September 30, 2022, private equity transactions with Enterprise Value-to-EBITDA multiples with valuations of $25 million to $100 million and $100 million to $500 million increased by 36 percent to 40 percent, respectively, when compared to 2021 according to PitchBook. As a result, top-tier businesses continue to command premium valuations.
M&A Market Activity
U.S. transactions volume for the 10 months ended October 31, 2022 was 7.9 percent lower than the same period in 2021, while deal volume for the month of October 2022 remained relatively flat, with activity 0.2 percent lower than the prior month as market headwinds prevail.
Transaction volume in the Pittsburgh M&A market for the 10 months ended October 31, 2022 was 20.3 percent lower than the same time period in 2021, while, conversely, October 2022 transaction volume was 35.7 percent higher than October 2021.
During the month, Pittsburgh saw the closing of several noteworthy transactions. Local companies, such as Wexford-based Coeptis Therapeutics Holdings, Lisbon-based BrightPet Nutrition Group, and Pittsburgh-based Duolingo, RoadRunner Recycling, and Federated Hermes completed acquisitions. Pittsburgh-based Incline Equity and Wexford-based Tecum Capital remained active and completed acquisitions as well.
Deal of the Month
On October 17, 2022 and October 20, 2022, Wexford-based Tecum Capital completed investments in TiniFiber Holdings and The Basement Doctor, respectively. TiniFiber is a fiber optic assembly and custom cable manufacturer, while The Basement Doctor is a vertically integrated provider of residential water displacement management services. With respect to TiniFiber, Tecum Capital will partner with Columbia River Partners, a lower middle-market private equity firm, to support the business’s ongoing growth initiatives. Meanwhile, the investment in The Basement Doctor represents Tecum Capital’s first platform investment out of its recently relaunched control equity strategy, Team Equity Alpha Management.
Evan Lyons is a Senior Associate with MelCap Partners, LLC, a middle-market investment banking advisory firm. For more information on MelCap Partners, please visit www.melcap.com or email [email protected].