As the volume of U.S. leveraged loans supporting buyouts surged in the fourth quarter of 2020, after two quarters of curtailed activity due to COVID-19, purchase price multiples on LBOs rose markedly.

The average purchase price multiple for U.S. LBOs in the fourth quarter was 11.96x, according to LCD, exceeding both the record full-year level of 11.51x in 2019 and the 11.40x average on LBOs completed during all of 2020.

As purchase price multiples rose in the fourth quarter of 2020, debt levels on large-cap buyouts followed the upward trajectory. While the average debt multiple on LBOs fell to 5.7x in 2020, from 6.0x in 2019, in the fourth quarter of 2020 the average debt multiple hit 6.1x, in a sign of increased optimism by credit investors and continued recovery of the market.

LCD data shows the average equity contribution to LBOs in 2020 was steady with 2019 levels, at 47%. It declined marginally in the fourth quarter of 2020, to 46%.

In some recent transactions private equity sponsors have opted to retain minority stakes. High asset valuations mean a private equity sponsor can sell a smaller stake to book an impressive return for investors. It is also a sign that an existing private equity sponsor believes a company has more room to grow, which is never bad news for incoming investors.

Much of the LBO activity was in the tech sector, which includes software companies. Software companies were perceived as resistant to the pandemic, with cash flow from software critical for operating business more reliable than other payments, in many cases.

As for LBO loan pricing, the market tipped somewhat in favor of lenders after a tumultuous stretch in 2020. This followed a decadelong bull market, marked by tightening spreads and loosening documentation terms in credit agreements.

The data bears this out. All-in spreads over Libor on large-cap LBOs increased in 2020 versus 2019 levels. The average all-in spread in the fourth quarter for LBOs was lower, however, than the full-year average in 2020, a sign of increased competition for deals, and continued recovery of the market, amid the end-of-year flurry of activity.

The volume of total LBO activity in the fourth quarter surpassed each of the other three quarters of 2020. Despite the end-of-year spike in deals, full-year 2020 transaction volume failed to make up for subdued second- and third-quarter activity, when volatility and uncertainty about the pandemic's economic impact kept some buyers and sellers to the sidelines.

Buyouts and acquisitions drove a 50% increase in U.S. leveraged loan volume in the fourth quarter, from the third quarter, to $44.2 billion, according to LCD data. LBOs had a particularly strong showing, with a 103% quarter-over-quarter rise, to $23.4 billion. That was the largest volume of buyouts since the third quarter of 2019.

Total LBO transaction volume by deal count, at 186, was in line with 2016 levels, well short of the recent peak in activity in 2018, when 275 large-cap LBOs closed.

Most of the buyout activity was at the larger end of the market, LCD data show.

New buyout deals slowed amid the economic uncertainty that gripped markets through the second quarter and into the third quarter, but private equity firms clearly have grown more confident since then. Among LBOs launched in the fourth quarter of 2020, benchmarks printed for Ancestry.com LLC ($1.6 billion), Les Schwab Tire Centers ($1.575 billion), US LBM Holdings Inc. ($1.35 billion) and Consumer Cellular Inc. ($1.1 billion).