Global PE Deal Multiples & Trends For 2015 by PitchBook
2015 Annual Global PE Deal Multiples & Trends – Introduction
Well-documented external economic and market forces imposed a heightened level of uncertainty in the back half of 2015, and we saw that impact deal flow and the related dynamics of the deal environment. A group of debt packages for mega-sized deals were slowed or in some cases pulled, and prices for certain transactions moved lower to help quicken the closing process and help lenders feel more comfortable with the amount of capital they were being asked to deploy. Further, we saw an increase in the discrepancies between buyers and sellers as the environment sustained its uncertainty, leading to various transactions moving past their expected 4Q close dates and into 2016.
Keeping all that in mind, we expected to see multiples move lower due to the aforementioned volatility. They didn’t. We expected to see debt as a percentage of deals move lower. It didn’t. We thought we’d see a persistently low general fee environment. We did, somewhat, but we also saw an uptick in certain fee types. We think much can be explained by the quality of deals that were included in this report sample. Best-in-class deals likely were not affected by an uncertain deal environment, however, many that subsequently were saw their close dates pushed out of the timeframe the data in this report covers. We’ve looked to provide the necessary datasets and analysis to help you make sense of the current PE investment environment and we hope this report helps inform your decision-making process.
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We expected the unsure global economy and the chop experienced across public equity and debt markets to lead to a decline in PE deal multiples, however, transactions closing in 4Q 2015 continued to see multiples trend higher. Overall EV/ EBITDA multiples came in at 8.3x, relative to 7.5x in 3Q and 7.7x in 4Q 2014. The biggest quarter-overquarter (QoQ) percentage shift came in transactions valued at over $250 million, which saw 4Q multiples grow over 19% to 11.9x. We’re certainly well aware of strategic competition driving up required bids needed to win deals in auction processes, but PE firms have simply been unable to rationalize bidding the book in many deals.
Further, we’ve documented the concerns we’ve had regarding valuations certain deals are fetching despite the quality of such businesses not necessarily warranting those multiples. That said, we think a couple of factors contributed to the continued move higher in valuations. Many deals that were potentially ripe to close in a more confident market may well have been the first to see their closing times push out of 4Q as dealmakers continued to negotiate terms, given the new concerns that were highlighted in 2H 2015. Even if those deals eventually closed at lower prices and valuations, our dataset only includes completed transactions for each period. Thus, the sample of 4Q closes potentially encompasses a greater percentage of top-tier assets that were able to garner frothy multiples despite the macro environment inducing trepidation for certain deals.
In what has appeared to be a low earnings growth environment, creativity to thin out the expense portion of the income statement becomes vital, but inevitably, the top line has to grow to reach sustainable multiple expansion over the long haul. Various paths can be taken to achieve this, yet the current initiatives used for margin and profit expansion with flat revenues become increasingly scrutinized in today’s environment. If the macro does move lower, certain positives such as operating leverage can become negative and “economies” of scale can become “diseconomies,” which only hurt the bottom line. To combat this, PE dealmakers either continue to chase targets that have already displayed significant and/or sustainable revenue growth, or have the operational prowess and potential add-ons in mind to provide revenue lift sooner rather than later.
Speaking to this, 69% of our survey respondents claimed to have completed 4Q deals with targets that had shown TTM revenue growth; 34% acquired companies that saw their top lines grow more than 10% on a TTM basis. Over the last couple of quarters, respondents expecting unchanged revenue change in the 12 months following their acquisition came in at 19% in 3Q and 17% for 2Q. That figure moved much lower in 4Q, with only 9% of respondents expecting their targets to see flat revenues over the next year. Continuing to examine future predictions, 87% of our survey takers expect to see top-line growth in the next 12 months, with 44% expecting that growth to exceed 10%. Interestingly, just 25% of respondents in 3Q expected revenue or sales growth between 0% and 10%; that number has moved higher to 43%, according to our 4Q survey.
Debt & equity levels
Contrary to the concerns 3Q introduced related to junk debt and the lack of adequate financing packages for various LBO candidates, the median debt percentage used in 4Q transactions actually skewed higher on a quarterly basis, according to our survey results. The quarter saw that figure come in at 52%—the highest of any 2015 quarter—yet outside of last year, that figure represents the lowest figure we’ve seen since 1Q 2012. As previously mentioned, we think the sample of 4Q transactions includes higher-quality deals that likely proceeded relatively unaffected by the financing issues overly expensive and second-tier deals experienced. Thus, that debt figure may be skewed higher as the cleanest deals were able to justify a greater debt package in proportion to total deal value. The average figure for non-senior debt used in 4Q transactions dropped more than 31% on a consecutive basis.
Middle-market lenders have certainly fared better than lenders at the high end looking to deploy capital into mega-deals, yet pricing has become an increased concern for even MM lenders in a competitive environment. Subsequently, quality is also a concern pushing them away from purchasing heavy amounts of unsecured debt. We expect this to remain the case for the short to medium run.