Good news for GPs looking to sell: global private equity exit volumes reached their highest level in six years in 2013, with multiples also edging up, according to new research.
The number of global private equity exits reached 1,659 last year, up from 1,503 exits in 2012, according to a study by advisory firm American Appraisal.
The study suggested that exit multiples, which edged up last year from 9.4x to 9.5x, may soon soar to pre-crisis levels – hitting 10.6x in 2014 and 11.4x in 2015.
“After a rich run of exits in recent years, [private equity] distributions to investors have outpaced investment in new funds,” the study said. “Investors are now moving quickly to redeploy this capital in the next vintage of funds, which has seen buyout war chests grow to record levels. Debt markets are recovering too.”
Leveraged loan and high-yield bond issuance is up, allowing GPs to access larger debt packages at low prices, the research added. “With such substantial pools of capital sitting in [GPs’] coffers, competition for deals between firms will be intense, which should also push up multiples.”
While overall deal volumes were fractionally down last year, falling from 2,102 in 2012 to 2,082 deals in 2013, deal values increased – from $277 billion in 2012 to $302 billion in 2013. According to the study, dealflow will increase again this year and next year, to the extent that it will “possibly surpass figures recorded at the peak of the market in 2007”.
“A resurgence of acquisitions in the private equity industry is now widely observed and I expect the trend to continue,” a partner at an Indian firm said in the study. “With the rise in the number of financial buyers and the competition that will entail, it is likely to spur competition and thereby EBITDA M&A multiples for buyouts.” The increase in deal flow will also be fuelled by corporates, which have also started to return to market and look for quality assets in GPs’ portfolios, American Appraisal concluded.
“The main reason that you would pay a higher multiple is that you would see better growth opportunity, so I think it’s a positive statement on the global economy,” Michael Weaver, head of American Appraisal's UK practice and chairman of the global firm's strategic advisory board, told Private Equity International.
However, the flipside of rising valuations is a risk that GPs could end up overpaying on deals, according to a recent study by Mergermarket and international law firm White and Case, which suggested that freely available debt and large amounts of dry powder would see competition for new deals intensify. “Firms need to be disciplined and careful about not overpaying for assets,” the study warned.
“Valuations are very high at the moment,” Christian Hollenberg, co-founder of Perusa told PEI in a recent interview. “We're seeing some really awful businesses that absolutely have no right to exist and they wouldn't have come to the market if it wasn’t for this extremely distorted valuation environment.”