Packed with survey data from industry participants and extensive metrics regarding PE transactions, our latest Global PE Deal Multiples Report unearths some intriguing findings:
- Just over half of survey respondents believe acquisition multiples are too high to facilitate the same type of PE returns as in the past
- Average equity contributions have hit 57% of EV through mid-September—the highest we’ve tracked
- In 3Q, 61% of deals involved companies with over 10% TTM revenue growth, the greatest percentage ever in our survey
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
- Average equity contributions have climbed to 57% of EV through September 18, the highest in our dataset. Higher equity contributions could suppress future private equity returns, given that the industry has historically relied upon significant levels of debt financing.
- In 3Q, 61% of deals executed by survey respondents involved targeted companies with over 10% revenue growth in the trailing twelve months (TTM)—the greatest percentage of high-growth companies reported in our five years conducting this survey.
- Following a reported dip in median EV/EBITDA multiples during the first half of the year, acquisition multiples reached a median of 10x during 3Q. This is more in line with what we have seen in our non-survey data and is likely to persist given continued upward pressure on acquisition pricing.
Each quarter we survey PE investors to get an inside look at deal terms, multiples and investor sentiment. To better assess current market sentiment at time of publication, this survey includes deals completed from April 1 through September 19. One of the most significant changes from previous surveys is that 54% of PE general partners (GPs) surveyed believe that acquisition multiples are now too high to facilitate the same type of returns PE has enjoyed in the past. While future performance is always uncertain, one thing that is certain is that industry dynamics will continue to evolve and change rapidly as private assets continue gaining favor from institutions with large amounts of capital and long-term investment horizons.
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Survey Population & Market Sentiment
The data for the survey includes transactions completed in 2Q through September 18, with a near even split among deals between 2Q and 3Q. Participant involvement largely reflects the overall market, with 38% of all deals focused on the B2B sector and falling interest in B2C, which now sits at 19% compared to 22% during the survey covering 1Q to 2Q. This decrease is consistent with the abundance of discussion surrounding the falling dominance of brick-and-mortar retail.
Discovery of adverse information through diligence remains the primary reason deals fall through, but sellers receiving another offer accounted for 30% of all deal failures 2Q and 3Q.
This exemplifies the competitive market PE firms must navigate to acquire the most attractive targets. With competition so high, it is no surprise that 54% of GPs surveyed believe deal multiples are not within a range to allow for typical PE returns. Despite relatively flexible credit markets, 20% of deals were cancelled or renegotiated because financing contingencies were not met, which may also be an indication of the abnormally high valuations relative to typical quality that private companies are able to demand today.
Upward pressure on multiples likely to persist
Following four years of steady EV/EBITDA multiples reported by survey participants, we saw a significant drop in acquisition multiples during 1Q and 2Q. However, median EV/EBITDA multiples have since moved in the opposite direction, reaching 10x during 3Q. This is well above the five-year median of 7.6x and is driven by a shift in the data points at both ends of the distribution. Not only did 3Q see several transactions with EV/EBITDA multiples of 20x or more-compared to just one or two such deals in 1Q and 2Q-but just 8% deals in 3Q had an EV/EBITDA multiple below 5x, compared to 42% in 1Q.
Revenue multiples were also elevated in 3Q at 1.6x EV/revenue, which is up from the five-year median of 1.2x. Last quarter we discussed how revenue and EBITDA multiples had been moving in opposite directions, but this divergence seems to have corrected, as both trended up in 3Q. However, the move in EBITDA multiples (48%) was much higher relative to the upward bump in revenue multiples (10%).
The drop in valuations during the first two quarters of 2017 was surprising given that the competitive environment has not abated, global growth remains relatively strong, and easy access to credit has put leveraged loan volume on a pace to surpass the 2007 record of $534 billion1.
Acquisition multiples rebounded as these three factors continued to shape the PE landscape, and it is likely that upward pressure on acquisition multiples will persist through the rest of the year. Deal flow was also down during the first half of the year, suggesting that investors either held off on making deals due to a lack of quality targets or chose to acquire less desirable companies to avoid paying the higher valuations we see in the market today.
Buyers remain sanguine
In 3Q, 61% of deals executed by survey respondents involved targeted companies with over 10% TTM revenue growth-the greatest percentage of high-growth companies reported in our five years conducting this survey. This is well above the five-year average of 43% and helps to explain why so many deals in 3Q had EV/EBITDA multiples of 20x or more. In addition to higher-growth companies, there were six massive public-to-private LBOs that also necessitated higher valuations to incentivize stockholders to sell their shares. Further demonstrating the extent investors were willing to pay for high-growth companies, target companies that had an increase in revenue during the prior 12 months garnered a median EV/revenue multiple of 1.38x, compared to 0.88x for companies whose revenue had decreased during the TTM.
Investors also expected these companies to continue their high rates of growth, with two-thirds (67%) of respondents believing that their acquisitions will see over 10% revenue growth during the12-month post- acquisition period. Perhaps unsurprisingly, only 2% of respondents in 2Q and zero respondents in 3Q believe their acquisitions will see a decline in revenue over the next 12-month period. The EV/revenue acquisition multiple, however, did not vary greatly depending on the expected revenue growth over the first 12 months post-acquisition, with a median 0.03x difference between those who expected decreased revenue and increased revenue following the acquisition.
Read the full report here by PitchBook