Private Equity Deals & Transactions

US buyers paying premium for revenue, research suggests

In contrast, European buyers paid a greater multiple for higher profits, the data from CEPRES showed.

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Buyers of North American businesses are placing a premium on revenue growth, while those buying in Europe are currently placing most value on earnings, according to pricing analysis by technology platform CEPRES.

The median price paid for a US business in 2016 was 2.08 times its revenue, while among the top quartile, the price was 4.64 times revenue.

“The analysis showed US buyout and growth deals in the top quartile are priced with the highest premium paid for revenue since 1999, while EBITDA multiples are steady,” the research stated.

The geographic split could be explained by the types of businesses available in the respective regions, according to Corentin du Roy, managing director at HarbourVest Partners.

“On the US trend to pay more for stronger revenue performance, this could be influenced by the dominant tech sector in the US. There are lots of software companies which are mature, but fast growing, with increased growth potential,” Corentin du Roy, managing director, HarbourVest Partners, told Private Equity International.

“As a traditional comparison, Europe’s investment market still features many industrial companies with high earnings, but their growth is less dynamic,” du Roy added.

Investors are also likely to view more profitable companies as lower risk, as they’ve invested in scale and improved their infrastructure, prompting investors to pay a higher price for them says Andrew Aylwin, a partner at UK-focused private equity firm, Lyceum Capital.

GPs paying higher multiples based on strong revenues may view those companies as having strong growth potential, Aylwin said.

Prices really began to increase in early 2014, says Aylwin.

“We found that we were being outbid for companies we believed we had a good chance of acquiring,” said Aylwin “At the time, there were a lot of opportunities flying around – the advisory community were selling assets quite hard, but a lot of the deals fell through. Pricing stabilised in 2015 and 2016, as people recognised they had to be more disciplined in investing over a longer term,” he added.