By Marcus Leach
The Private Companies Price Index (PCPI) which tracks the price/earnings (p/e) multiples paid by trade buyers for private companies remained steady with a marginal decrease this quarter from 10.8 to 10.6.
Looking back at the PCPI’s performance since the recession began in 2008 multiples have fluctuated between 9.0 to 12.0, and the consistency seen in the last two quarters indicates that private company pricing is now beginning to stabilise.
In contrast, the Private Equity Price Index (PEPI) has increased considerably this quarter from 10.8 to 15.0. This has been influenced by a higher proportion of deals in the technology sector, where private equity firms have paid higher multiples to acquire technology related companies. PEPI is not expected to continue at this level longer term.
The following factors this quarter have driven up the index by c. 40 per cent:
- Private equity firms are willing to pay higher values for good quality assets operating in unique and interesting niche sectors
- The nature of these businesses being high growth where underlying profitability can be significantly higher
- The limited availability of these top quality companies combined with the large sums of private equity money available to be invested means that numerous private equity houses are often competing against each other to acquire assets, which can influence the prices being paid.
Total deal volumes (trade and private equity) have increased by 27% compared to the previous quarter (560 deals in Q3 compared to 439 in Q2), and are at the highest level seen over the previous four quarters.
However, much of this uplift is likely to have occurred because deals are taking longer to complete and a number of Q2 deals have rolled forward into Q3, and not because of a true upward trend in market.
Although the PCPI and PEPI are performing well in the tough economic climate, the macroeconomic events we have experienced over the last quarter have had a dramatic effect on consumer confidence in the quoted market and the listed companies non financial index decreased dramatically this quarter from 11.9 to 9.3, which is the biggest fall in this index since Q3 2002.
The increase in debt levels in the USA, the degradation of the credit ratings for Greece and Italy and the ongoing Eurozone crisis have all caused uncertainty in the market, which means investors are acting more cautiously.
In summary, the M&A market remains delicate. Top performing companies which have built up large cash reserves are now looking to pursue acquisitive growth strategies and private equity firms with large uninvested funds are keen to make investments.
This makes predicting deal volume and pricing in the next two quarters difficult as there remains a huge uncertainty over the wider economy but this is balanced by M&A appetite from both private equity and cash rich corporates. However, current experience illustrates that there can be large volatility in pricing and deal completions are being delayed.
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