Private equity deal volumes and valuations are beginning to diverge with the pace of PE investment activity slowing year over year while valuations have climbed to a 10-year high, according to Murray Devine’s inaugural H1 Private Equity Valuations Report.
The report, which analyses data provide by PitchBook to examine trends in PE deal volume and valuation multiples for the first six months of 2017, reveals that this is a tendency more common near the end of a market cycle when sponsors typically target high-quality asset with defensible market positions and lower-quality businesses may fail to trade hands due to mismatched buyer and seller expectations.
In the first half of 2017, US private equity deal volume reached USD327.9 billion. With sponsors closing a total of 1,808 new investments the aggregate number of deals compared against the first half of 2016 decreased more than 15 per cent. This decrease contrasts with the ascent of deal valuations which, as a multiple of EBITDA, reached 13.7x in the first six months of 2017. In addition, the data shows the debt markets remain quite fluid for PE buyers with average debt multiples at 7.2x EBITDA in the first half.
“With so much dry powder in the private equity market, against the backdrop of an enthusiastic lending universe, competition for high-quality companies remains high,” says Daniel DiDomenico III, Senior Managing Director at Murray Devine and author of the report. “As expected, valuations were highest in the large market, but the elevated prices in both the small and middle markets underscore that investors are likely relying less on multiple expansion as part of their return calculus today.”
Murray Devine’s First Half 2017 Private Equity Valuations Report also quantifies the extent to which PE buyers are paying more than their strategic counterparts and highlights the budding investor interest, based on the prices being paid, in the consumer and technology sectors.
“Where valuations go from here remains to be seen,” says Dennis Murray, President and Co-Founder of Murray Devine. “Such elevated entry prices can present certain challenges for private equity buyers but also reflect the confidence of investors in their ability to effect positive change and add material value during their ownership periods.”
