A growing number of dealmakers are expecting tech asset valuations to fall, a report has found.
More than half of dealmakers (54 percent) anticipate a decrease in private company M&A pricing over the next 12 months, up from 32 percent in October last year, according to the M&A Leaders’ Survey by 451 Research and law firm Morrison & Foerster. The last time respondents were so confident of a decline – April 2016 – the annual median multiple plummeted the following year.
Valuations are already on the decline. The median trailing revenue multiple on private equity transactions hit an annual record 3.8x last year and has fallen to 3.2x since the start of the year, which is still the second-highest level on record. Among private companies selling for $100 million or more, the median multiple stands at 5x trailing revenue in 2019, down from 5.3x last year.
Financial sponsors have executed 7 percent fewer deals this year, compared with last year’s record haul, the report noted. The number of dealmakers predicting a slump in transaction volumes almost doubled to 28 percent – only the second time more than one-quarter of respondents have forecast a decrease.
High valuations were cited as the principal factor in falling deal activity, followed by the need to put greater equity into each transaction and an increased focus on exits.
Exits are becoming harder to find. Only $55 billion has been spent on acquiring private equity portfolio companies so far this year, on track to finish well below last year’s $98 billion record, the report noted.
Amid an expected decline in cross-border M&A across most regions, respondents were most bearish on targets in Asia-Pacific markets, where 48 percent expect diminished activity by international acquirers. Some 42 percent expect a similar decline in Western Europe.
Trade disputes were identified as the biggest potential hindrance, followed by the Committee on Foreign Investment in the United States regulations and Brexit. Only last month, the Trump administration blacklisted eight Chinese AI companies on humanitarian grounds.
A decline is at odds with the wealth of capital available for Asian technology companies. KKR is just one of a number of firms raising a dedicated vehicle in the region; it is joined by 160 additional funds in market as of 30 October targeting $8.1 billion for Asia-Pacific tech, according to PEI data.
“A lot of Chinese growth and VC funds now feature a heavy tech component and there’s a large focus on tech within the Asian landscape more generally,” Niklas Amundsson, a Hong Kong-based partner at global placement agent Monument Group, told Private Equity International last month.
“Asia tech funds have to compete with each other and the BATs [Baidu, Alibaba and Tencent] of the world, who’ll be investing directly and through their affiliated firms.”
Chinese returns have reflected bloated valuations, with median return multiples for the country’s new economy business falling to less than 2x in 2016–18 from 4.7x in 2014–15, according to Bain & Co.
Morrison & Foerster and 451 Research surveyed 101 respondents including investment bankers, M&A executives and lawyers, as well as various private equity and venture capital professionals.