GCG’s Q3 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 public company performance index has shown negative results in all but two industries. Automotive was the biggest industry gainer in the middle market during the prior 12 months showing an increase of 8.4 percent during the past year. Technology & IT Services also showed an increase over the past year, rising approximately 6.2 percent for the year. The remaining industry sectors in the middle market had a negative year over year performance.  This contrasts with the large cap index as measured by the S&P 500 which gained 14.4 percent over the past 12 years. Clearly, the value creation in the public markets is happening primarily with the larger companies in the market.

• • While Automotive and Technology & IT Services had the best performance and positive years, other industries were negative. The Industrials & Manufacturing sector was the worst performing at negative 33.8% over the past year. Food & Beverage was also down over 30 percent for the year marking the 2^nd worst performance in the middle market industry segment. While all sectors increased from their Q2 lows, Real Estate, Food & Beverage and Industrials & Manufacturing were the worst performers. The performance of these sectors has been impacted by the Work from Home (“WFH”) trend, 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.

• • The median quarterly middle market public company revenue multiples remained basically unchanged from Q4 2019 through mid-Q1 2020 remaining at 1.9x. The only exception was the 21% drop in revenue multiples in the March/April 2020 timeframe. The revenue multiples have recovered past the 1.9x level by September 2020 to 2.1x, reaching a 12-month high of 2.2x in the process. The median EBITDA multiples also remained at 9.4x – 9.7x from Q4 2019 through mid-Q1 2020. This changed abruptly in March 2020 when the U.S. began to experience the full brunt of the pandemic. At its low in April 2020, EBITDA multiples decreased to 7.3x over two full turns from February and two and a half from January and the start of 2020. By the end of Q3, however, multiples had returned to the February 2020 level and even momentarily passed the 9.7x seen through Q4 2019, before setting just below 9.6x in September 2020.

• • Middle market public and private company transaction deal value and volume for Q3 2020 rebounded from the worst performance of the previous five quarters in Q2, with increases of 142% and 88%, respectively. There is still a significant decline on a year-over-year basis with deal value and volume decreasing 24% and 36%, respectively. The large decline was due to the uncertainty of the COVID-19 virus and the economic impact on target companies an acquirers alike. The uncertainty resulting from the pandemic and the 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. Q4 will also be heavily influenced by the upcoming election and investors’ predictions on the outcome.

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