The scarcity in the number of quality businesses coming to market, coupled with a lack of availability of debt funding, has impacted private equity yet again this quarter as the number of deals continued its year-long fall, according to research released by BDO’s corporate finance team.
This contrasted starkly with private company trade sales which reached their highest number since Q3 2011.
According to BDO’s quarterly Private Companies Price Index (PCPI) and Private Equity Price Index (PEPI), the number of private equity deals completed in Q3 2012 stood at 77, the lowest since Q2 2011 (when 68 were seen) and the second lowest in the past two years. By contrast however, at 466, the number of trade acquisitions completed in the last quarter was the highest since Q3 2011 and the second highest in the past two years.
Interestingly, while deal volumes are moving in opposite directions, the multiples paid by buyers on both sides is converging. During the period, private equity buyers paid an average price/earnings (p/e) multiple of 13.3, up 11 per cent from 12.0 in Q2 2012. Trade buyers paid an average p/e multiple of 13.1, down marginally from 13.3 in Q2 2012. These valuations represent a significant premium to the average p/e of the Financial Times Non-Financials Index which, despite its eight per cent rise to 10.6 from 9.8 in Q2 2012, remains well below its post-financial crisis peak of [c.15].
Peter Hemington, M&A partner, BDO, says: “These figures show that cash-rich corporates are gaining ground by making strategic deals for growth and synergies whilst private equity deal flow is being hampered by the current funding environment.
“There’s been a huge shift in private equity deal structures in the past few years where deals, which once typically comprised of 60 per cent debt to 40 per cent equity, are now funded by around 70 per cent equity. Given that this structure relies more heavily on strong earnings potential to provide sufficient returns, private equity companies are struggling to compete with corporates on anything but the highest quality businesses – pushing up valuations on the deals that do get past the finishing line.”
