Prices paid in the European mid-market hit record levels in the third quarter of 2016, according to data from Argos Soditic, a private equity firm, and Epsilon Research.
The average price paid for a business in the eurozone was 9.2x earnings, rising above the 9.1x high watermark set in 2006, according to an index published last week. Trade buyers were the driving force behind increasing valuations, paying an average multiple of 9.6x EBITDA, compared with private equity buyers, who paid an average 8.7x.
In early 2009 the average multiple was at its lowest at 5.7x. It has been climbing steadily since early 2013.
The increase in acquisition multiples is “happening in a financial and micro-economic market which is very favourable to mergers and acquisitions”, said the report’s authors, who cited historically low interest rates combining with “a buoyant micro-economic environment” – namely cash-rich strategic buyers combatting slow macro growth by expanding through acquisitions.
Extreme market valuations are a major concern to LPs, according to the PEI Perspectives survey, conducted last November. More than two-thirds of investors ranked valuations as one of their top three concerns, alongside low interest rates and a global economic slowdown.
“All the indices showed last year that prices have been at their highest levels and this has been maintained through the end of the year,” said Christophe Bavière, president of Idinvest Partners, a firm that invests across multiple private equity strategies in Europe. “Our analysis suggests that prices will remain high and so investment firms need to adapt their investment strategies to focus only on high quality businesses and businesses that you can help grow faster than they otherwise could.”
At a media briefing in London in December, The Riverside Company co-founder Stewart Kohl said the firm was building into some of its portfolio company modelling an assumption that multiples will contract by one to two turns between entry and exit. This makes a focus on operational improvements more important than ever.
Isobel Markham contributed to this report.