The main indicators of Private Equity reflect a tense price environment. However, a more nuanced situation for Jean-Yves Lagache, Head of the Fund Investments team, who, through his analysis of transactions carried out by well-known European buyout managers, identifies the appropriate strategies.

Unprecedented situation in terms of valuations

Acquisitions of unlisted companies by European mid-market buyout funds peaked in Q1 2018, with average valuations at 10x EBITDA. A level never reached at the previous high point in 2007.

No decrease expected in the short term

Indeed, over the past 5 years, the capital available to the funds has increased significantly while the investments made have grown much more slowly. In addition, there has been an extension of the investment period for some funds, reflecting the anticipated difficulty in deploying the capital raised while maintaining price discipline. Finally, new players with lower return objectives than traditional private equity funds may pay more.

A more nuanced situation according to market segments

The analysis of more than 130 transactions listed allows us to observe a clear hierarchy of prices and leverage levels according to the size of the companies.  Transactions on SMEs were concluded at moderate valuation levels (around 7x EBITDA) and with a low level of debt (around 2.5x on average). On the other hand, larger companies were acquired on average around 12x EBITDA and investment funds made substantial use of debt (more than 5x EBITDA on average).

3 recommendations

– Do not neglect the lower part of the market which represents less risk than the upper part;

– Favour managers with the ability to support companies on their strategy of internal and external growth and operational improvement;

– Give a significant place to private equity allocation to fund managers specialised in complex situations, enabling them to acquire companies outside auction processes at average prices below market prices.

Jean-Yves Lagache

Managing Director – Fund investments

This note is a viewpoint of Essling Capital. It is intended to inform its readers in general and does not constitute investment advice or solicitation. Essling Capital declines all responsibility for any errors or omissions it may contain.

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