Study: PE return multiples hit three-year low

Buyout firms got less bang for their bucks through asset sales last year, according to fresh research, as the rising share of secondaries continued to put pressure on asset valuations.

Private equity return multiples last year hit their lowest level since 2010, according to a report by advisory firm American Appraisal, which said multiples have continued to fall in the first quarter of 2013. 

Last year, private equity firms averaged an investment multiple of 9.4x on exits — that compares to 10.6x in 2011 and 10x in 2010. In the first quarter, investment multiples on exit have averaged 8.1x.

The firm attributed the lower multiples to 2012’s M&A environment, noting corporates were cautious, IPOs weren’t sure-fire and secondary sales to other private equity sponsors represented an increasing share of exit activity. Over the past eight years, American Appraisal noted, secondary buyouts accounted for roughly 20 percent of the volume of all private equity deals and 30 percent of the value; in 2012, that increased respectively to 25 percent and 40 percent. 

“The lack of IPOs and trade buyer sales has forced private equity firms to turn to one another, the largest rise of its kind for the past eight years. Until their options widen, liquidity-chasing private equity firms look set to make secondary buyouts a trend that will continue during the course of this year and beyond,” Mike Weaver, managing director at American Appraisal, said in a statement. 

While there are differing views as to the merit and return potential of secondary and tertiary buyouts, the American Appraisal study argued they produce lower return multiples than other exit routes. 

The issue was deemed most prevalent in China, where IPO markets have effectively been shut and private equity firms reliant on pre-IPO strategies will falter. The study noted, however, that China’s tighter listing requirements could help reverse a decline of exit multiples, if that meant only higher quality companies would eventually secure IPOs on the country’s public markets.