BDO LLP has published the latest results for Q3 from its Private Companies Price Index (PCPI) and Private Equity Price Index (PEPI).
The PCPI has seen price to earnings (P/E) multiples paid by trade buyers for private companies remain steady at 10.6 (Q2:10.8.) Since 2008, multiples have fluctuated between 9.0 and 12.0, but the consistency seen in the last two quarters indicates that private company pricing may be stabilising.
The Private Equity Price Index (PEPI) has increased considerably this quarter from 10.8 to 15.0 influenced by a higher proportion of deals in the technology sector which have commanded higher multiples and, therefore, values.
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 for 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 the market.
Where the PCPI has remained steady at 10.6, the PEPI has risen considerably as private equity firms have paid higher multiples to acquire technology related companies. PEPI is not expected to continue at this level longer term and this c.40% increase has been attributed to a number of factors including: the limited availability of these top quality companies combined with the large sums of private equity money available to be invested; private equity firms’ willingness to pay higher values for good quality assets operating in unique and interesting niche sectors; and the nature of these businesses being high growth where underlying profitability can be significantly higher.
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.
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 pools of non-invested (cash) funds are keen to make investments. This makes predicting deal volume and pricing in the next two quarters difficult as there remains some debate over whether the uncertainty within the wider economy will outweigh the 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.
Christopher Clark (pictured), M&A Partner, BDO LLP, says: “Current investor sentiment in the market is one of uncertainty owing to the many destabilising factors such as the degradation of Italy and Greece’s credit rating and the wider Eurozone crisis. These factors have caused a dramatic fall in the listed companies’ non financial index. However, despite the challenging and uncertain operating environment, trade companies have built up strong cash balances and private equity firms have large fund balances which they need and want to invest. This provides confidence that there is a will to undertake M&A but provides little visibility on pricing and timing.”
