Private Equity Environment for Middle Market

Talked to some lower middle market private equity guys last week--they said they were having trouble borrowing more than 2 turns on anything--and that is based on recession-reduced EBITDA. They are considering doing deals, taking the 2 turns, praying for a refi opportunity within 12 months so they can keep the excess equity for additional deals. A private wealth sales guy confirms that he's just not seeing new liquidity from business owners--they don't want to sell to private equity firms at the low prices implied by the lack of financing.

In the boom years, the math was interesting. Guy sells a business for $20 million, pays $3 million to the US Treasury, puts $10 million in public equity and $7 million in munis or other bonds. P/E firm put up $7 million in equity, $13 million in debt. Result was more new debt issued than funded. Tody same biz might get $7 million in debt with same EBITDA, or less if cash flows down. Even with 50% equity, P/E firm has a better deal than last year if the growth resumes--same equity, less debt. This only works if current owner takes a haircut,and most of them can wait.