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Resurgence of public markets drives M&A confidence as private equity weakens

A resurgence of investor confidence in public markets in the closing months of 2012 has left private equity funds facing an increasingly competitive environment for deals, according to research released by BDO’s corporate finance team.

With private equity already facing a dearth of quality deals, public company valuations have risen to their highest levels since Q2 2011, meaning that vendors now have a wider choice of where they sell their business.
BDO’s research shows a clear convergence as private equity valuations fell 18.6 per cent while public market valuations rose.  The average price/earnings multiple paid in private equity transactions stood at 11.8 in Q4 2012 (Q4 2011: 14.5), the largest Q4 on Q4 fall in private equity valuations since 2008, leaving multiples at the lowest level since Q2 2011. In stark contrast, the p/e multiple of the FT Non-financials index was up 17.9 per cent at 11.2 (Q4 2011: 9.5), which was the largest Q4 on Q4 rise in public market valuations since 2009 leaving multiples at their highest level since Q2 2011.
Peter Hemington, M&A partner, BDO, says: “2012 saw a weakening in the general M&A environment, particularly for private equity deals. However, the surge in the public markets has led to greater confidence amongst corporates looking to make acquisitions, leading to valuations of trade deals remaining relatively stable, despite the difficult backdrop. It would come as no surprise if public market valuations continued to increase as we move through 2013, meaning that private equity houses will need to move quickly to deploy funds and regain ground against increasingly confident corporates.”
According to BDO’s quarterly Private Companies Price Index and Private Equity Price Index, the number of private equity deals completed in Q4 2012 stood at 77; the last time lower levels were seen was in Q2 2011 (with 68 private equity deals). By contrast however, at 446, the number of trade acquisitions completed in the last quarter has been relatively stable, down three per cent on Q4 2011 and four per cent down on Q3 2012.

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