As deal prices fall, experts discuss whether this will be a golden opportunity for investors or a hindrance to exits
As deal prices fall, experts discuss whether this will be a golden opportunity for investors or a hindrance to exits
The macro environment made a sharp U-turn in late 2021, a backslide that persisted into 2022 and lasted throughout the year as recession concerns remain high for 2023. Central bank-rate increases used to combat inflation have taken a toll on equity markets amid weak initial earnings data, and bond markets alike. Through the end of September 2022, the base 60/40* portfolio was down about 20%.
These conditions have spread into private markets which saw deal valuations dip in 2022 compared with previous years’ highs. Preqin’s Asset-Level Benchmarks show that US-based buyout deals have been valued at a 10.5x enterprise multiple (EV/EBITDA) in 2022, down from about 14x at the start of the year, with technology deals leading the way.
Do you see this fall in deal prices as boon for private equity investors or will exits continue to be stymied by high interest rates and challenged equity markets?
Nils Koffka, Global Co-Head of Private Equity practice and partner, Private Equity M&A Group, Allen & Overy
Deal volumes are likely to remain muted in the first two quarters of 2023 but may pick up thereafter. For skilled and creative investors, the adjustment to valuation gaps will certainly generate opportunity. In this market, having an edge is becoming increasingly important, whether through established lender relationships or creative structuring by looking at all levels of the capital structure and documentation.
Important questions for investors to consider are whether the fall in prices will continue, and whether they should therefore bide their time. 2023 could well be a year of two halves, much, like 2020. At some point, transaction volumes may pick up quickly and investors don’t want to miss that moment.
Zia Ul Rab Siddiqui, Director of Investments and Partnerships, APICORP
As the period of easy monetary policies comes to an end, some market participants will have to pay the price. And rightly so. The period of high supply and low liquidity held asset prices artificially high, and while they have come down this year, there’s still a way to go. In turn, investors will need to readjust their return expectations and higher-risk bets won’t find continued support from central banks. As valuations slide this year, and we suspect they still have farther to fall, value is still going to be hard to find. Many asset prices we’re seeing are not in sync, making it more difficult to follow market logic.
Mislav Tolusic, Managing Partner, Marlinspike
We believe that early-stage valuations will remain strong as earlier-stage investors position their companies to take advantage of the influx of fresh capital into large funds. Once those large funds start deploying, we can expect late-stage rounds to recover some of the lost ground.
Acquisitions usually make up over 70% of exits. With public company trading multiples down, exit multiples followed. We believe that exit multiples will remain compressed, with the Fed guiding the market to focus on its terminal rate which could mean higher rates for a longer time. Implications for VC-backed companies are clear: companies will need to grow into the exit valuations vs. sell into the high multiples. In a way, nothing’s changed. Good companies will still have good exits, they’ll just have to do it the ‘old-fashioned’ way.