By Daniel Hunter
A marked improvement in the availability of debt financing for mid-market private equity deals has seen private equity deal values rise to their highest level in a year, according to BDO’s latest Private Company Price Index/Private Equity Price Index (PCPI/PEPI).
The index, which compares the EV/EBITDA ratios being paid on the sale of private companies to trade (PCPI) and private equity (PEPI) buyers, showed a quarter-on-quarter jump of 36% on the values paid for private equity deals – up to 10.5 in Q2 2013, from 7.7 in Q1 2013 – and marking the end of a decline that had lasted the previous three quarters. In addition, PE deal volumes (with 91 having completed) were up 26% on the previous quarter (72 deals) and were at their highest level in over a year.
Conversely, trade valuations continued their decline into a fourth quarter – down to 6.9, from 8.5 in Q1 2013, and a 27% drop year-on-year. Additionally, the number of trade deals completed, at 380, was the lowest since Q2 2011.
This marked disparity arises from the differing ability to access debt finance between the two groups and the diverging pressures placed upon them by their shareholders and investors.
On the one hand, private equity houses are able to tap into more sophisticated funding products via multiple sources, with larger houses now securing finance from the US and Japan. There is also investor pressure on them to recycle deals within a much shorter time frame than companies.
Conversely, trade buyers are still struggling with the poor credit conditions offered by traditional lenders. Furthermore, regardless of whether companies have built up war chests and, therefore, don’t require debt funding for deals, the continuingly fragile economic conditions place significant pressure on CEOs to ensure that acquisitions work and that deals and prices paid are fully justified to their shareholders. Against this cautious backdrop, the multiples being paid on trade deals are being squeezed and the number of deals getting over the line has continued in a downward trend.
“Confidence seems to be returning to the economy, illustrated by the rise in the number of deals being done and multiples being paid by private equity houses. Some sectors, in particular those that are service based – have seen a significant pick-up in trading recently and this, along with more robust pricing, is encouraging vendors to sell. Also, once deals are underway we are seeing that they are much less likely to falter than before,” Peter Hemington, Head of M&A, BDO LLP commented.
“For trade buyers access to finance is a continuing issue and a policy of caution seems to pervade, creating downward pressure on both prices and volumes. However, with the momentum being built by private equity coupled with an improving economic backdrop I expect to see companies shaken from their stupor and for the deal environment to improve across the board.”
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