GCG’s Q2 2020 Middle Market Update provides an overview of the latest trends in the market, including recent performance of select sectors and the state of the middle-market M&A environment.

Key findings include the following:

• • GCG’s proprietary middle market industry sector performance index has shown negative results in each industry. In all cases, the middle market performed well below the large cap stocks as measured by the S&P 500 index.

• • Technology was the single biggest industry gainer in the middle market at negative 14.3%. The Industrials & Manufacturing sector was the worst performing at negative 41.5% in the same 12-month period. While all sectors increased from their Q1 lows, Consumer Goods, F&B and Industrials & Manufacturing were the worst performers. The performance of these sectors has been impacted by tariffs and supply chain issues relating to the coronavirus. Additionally, the continued underperformance of the small cap stock sector compared to larger cap stocks has been consistent throughout the last 12+ months.

• • Middle market public company trading multiples ended the quarter in the same range as prior quarters. This is after rallying from market lows a few months back.  The revenue multiples have recovered to the 1.9x level by June 2020. The median EBITDA multiples have also remained in the range of 9.7x – 10.0x from the end of Q2 2019 through mid-Q1 2020. At its low in April 2020, EBITDA multiples decreased to 7.4x, over two full turns from February and two and a half from January and the start of 2020. By the end of Q2, however, multiples were improving, making up half of the drop from its February level. The increase in multiple throughout 2019 combined with decreasing stock prices for the middle market suggested that earnings in the middle market were significantly lower in 2019.

• • Middle market public and private company transaction deal value and volume for Q2 2020 exhibited the worst performance of the previous five quarters, with decreases of 60% and 55%, respectively. The decline is even more substantial on a year-over-year basis with deal value and volume decreasing 65% and 61%, respectively. The large decline was due to the uncertainty of the COVID-19 virus and the economic impact on target companies and acquirers alike. The uncertainty resulting from the pandemic and global economy will continue to put downward pressure on the volume and value of middle market M&A until a significant change to the current situation arises such as a vaccine or therapeutic that greatly reduces the chance of serious illness.

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