Buyout pricing dislocation creates market opportunity
CEPRES released research this week showing recently the US buyout market is driven by revenue growth, whereas Europe is driven rather by operating income.
The research used the CEPRES PE.Analyzer investment decision platform to analyse over $12 trillion of PE transactions to illustrate the disparity of buyout deal pricing drivers between North America and Europe and the higher end of the market versus the lower. The analysis shows US Buyout/Growth deals in the top quartile are priced with the highest premium paid for revenue since 1999, while EBITDA multiples are steady. Conversely in Europe, top quartile Buyout/Growth deals are paying a premium for operating income reflected in higher than normal EBITDA multiples, while revenue multiples are steady.
US EBITDA Multiples have remained stable for top quartile priced deals and deals below top quartile valuation have seen pricing pressure in recent years. Conversely, as shown in the attached chart, US valuations based on Revenue Multiples show substantial expansion for the top quartile in recent years and have surpassed prior peak revenue multiples seen in 1999. Deal valuations in Europe have experienced more volatility in recent years compared to the US market. Top quartile European deals continue to see sharp multiple expansion on an EBITDA basis while the lower 75 per cent have remained relatively stable. Investors in European companies are less willing to pay high premiums for revenue growth and European deal multiples on a revenue basis have deteriorated since peaking in 2014. Investors targeting Europe are placing heavier emphasis on profits which is driving up EV/EBITDA valuations at top quartile European Buyout/Growth investments, while the investors in US companies are paying the highest multiples since 1999 for top quartile revenue growth deals.
“We see investors in the US increasingly willing to chase top line growth for higher priced investments, whereas in Europe bottom line profitability drives valuations. High deal multiples are a leading indicator we could be approaching the peak of the current economic cycle and returns are likely to come under downward pressure going forward. In both 1999 and 2006 we observed valuations of the 25 per cent top priced companies decoupling from the larger private market sentiment. The dislocation is extended this time, having started in 2013, but historically this has been a reliable sign of overheating markets and potential for valuation pressure for the complete market.
This increasingly heterogeneous investment environment can create opportunities for niche strategies, but is also a reflection of market sentiment on local macro-economic outlook. This makes it more challenging for LPs to identify strategies that fit their programme targets. Thus LPs now rely on robust technical, fundamental and quantitative investment tools like PE.Analyzer for private markets. It is no longer adequate to benchmark against publicly sourced fund IRRs when investors need to understand the true drivers of market risk and returns and quickly measure risk adjusted alpha and beta correlation for their investments.”
Dr. Daniel Schmidt, Founder & CEO CEPRES