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High values & healthy deal flow – PE activity summary

Posted on October 30, 2014 By

“Despite steep price tags, deal flow remains healthy, and is actually strengthening.” That is the summary from Private Equity data specialist, PitchBook from its latest middle market report, which should be music to the ears of business owners selling or considering a sale in the near future.

Typically, PE buyers pay at the lower end of the value scale as they are primarily focused on ROI, whereas strategic buyers see other synergistic benefits that can lead to higher multiples being paid. Now it seems PE firms are willing to part with higher multiples to capture their target companies, with 10.7x EBITDA being the average multiple paid for middle market companies thus far in 2014.

So, what’s changed in the PE industry? Why are firms so willing to part with much higher values than they have previously? The two key factors behind this trend are confidence in the economy and pressure from investors.

Confidence in the economy is hugely important within the PE industry, particularly given the extended economic downturn of recent years. Well, confidence is back and seemingly in a big way. The multiples currently being paid for middle market companies by PE firms are unprecedented and are a perfect example of the economic confidence held within an industry which typically steers well clear of over stretching.

Another important factor impacting the PE deal values is the pressure to invest. Throughout the economic downturn, PE activity dropped significantly, with most firms opting to keep their powder dry and pursue opportunities once the perceived risk subsided. With investors now demanding that firms put their money to work, firms are under pressure to keep them satisfied and are putting their ingrained reservations to overspend to one side.

Alongside the trend of increased multiples, another noteworthy PE trend is the shift toward the middle market. In 2014, middle market acquisitions accounted for 82.9% of total PE activity, up from 70.2% in 2013 - a significant increase, which highlights the overall confidence in the middle market.

These trends are very encouraging for middle market business owners selling or considering a sale in the near future, as their combined effect with increased demand from corporate acquirers leads to competitive bidding and high values being achieved.

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