Confidence to embark on significant mergers and acquisitions is returning to the world’s largest companies, according to KPMG.
The firm’s latest Global M&A Predictor shows that corporate “appetite” for large transactions – which it evaluates by looking at the forward price/earnings ratios at 1,000 of the world’s largest companies by market capitalisation – has risen substantially over the last six months. P/E ratios are up 15 percent since June 2012 and 12 percent year-on-year.
The study also found that corporates have an increasingly stronger “capacity to transact” (which it measures via a forecast of net debt to EBITDA ratios). KPMG expects this figure to rise by 15 percent over the next 12 months.
This contrasts with the trend observed over the last two years, when appetite and capacity seemed to be out of synch. While net debt to EBITDA ratios were up during the whole period, lifted by a concerted effort to deleverage, forward P/E ratios steadily declined.
That may not sound like very good news for private equity, Tom Franks, global head of corporate finance at KPMG, told Private Equity International – since more trade competition during auctions should, theoretically, make it more difficult for buyout firms to secure deals.
A more confident deal environment will not only encourage more buyers into the market but also more sellers
Buyout firms were also better placed to deal with the recent onslaught of regulatory inference, he argued. “A significant number of the major deals that we’ve seen recently have been subject to a far greater degree of regulatory scrutiny. Private equity firms don’t have the same competition or tax transparency issues than big corporates, so they’re well placed to take advantage of that.” That would add-up to a widening of exit opportunities for GPs, he said.
A boost in buyers’ confidence will offer better returns to sellers, he explained, whilst a sustained growth in P/E ratios should eventually lead to a reopening of the IPO market. “I think there are cycles: at some point, IPOs will come back. And that’s got to help private equity exits as well.”
Not all industries were thought to be promising for buyout firms, however. Whilst consumer and retail were seen as fertile grounds for private equity-led deals, competition from cash-rich corporates was deemed too strong in more consolidated sectors of the global economy.
“It’s going to be increasingly difficult for private equity firms to compete in industries like natural resources, or utilities, where corporates have the sheer scale to enjoy real synergies, can afford the often significant capital investment, and can therefore afford to pay a higher price for assets,” Franks said.