US buyout funds are paying more for less

In 2021, the average multiple paid for a US-based asset hit a record high even as earnings slid 

As competition in the US buyout market intensifies, funds are paying a whole lot more for deals. That’s true not just in absolute terms, but in relative terms as well. Let’s start with absolute numbers. At the end of 2020, the average deal value for a US-based asset was $1.05bn, which is an annual increase of 10% on average since 2011 (Fig. 1). But 2021 saw a much sharper rise when the average deal value spiked by $307mn, or 29.4%. Not only are fund managers faced with higher prices – they’re also paying more for less.

Here’s what the data tells us. Using Preqin's Asset-Level Benchmarks, we can calculate revenue and earnings or EBITDA multiples over the 10 years to 2021. Fig. 1 shows that, while the ratio of enterprise values to revenue has remained fairly stable over the past decade, the ratio of enterprise values to EBITDA has risen sharply in recent years. As recently as 2017, buyout funds were paying a median of 2.1x revenues and 10.3x EBITDA for assets. Fast forward to 2021, and while the EV/Revenue figure has shown a modest increase to 2.8x – the median EV/EBITDA multiple has jumped to 14.3x.

Here's another way to illustrate what’s happening. To calculate implied revenues, profits, and the respective margins, we used a base enterprise value of $500mn. Over the four-year period ending 2021, there’s been a decline in both revenues and profits. In 2021, a buyout target valued at $500mn would have an implied annual revenue of $178mn (Fig. 2). That’s up from 2020’s $166.7mn, but nearly $100mn lower than what it was in 2016. Meanwhile, the implied profits – or EBITDA – have declined each year since 2015, falling by almost a third to $35mn in 2021, from $52mn.

The EBITDA margin, or EBITDA divided by revenue, also slid in 2021. This suggests that profits fell at a faster rate than revenues. The implied margin dropped in 2021 to 19.6%, falling more into line with the period between 2015 and 2017 (Fig. 3). This drop in profitability is likely more connected to market forces. The second half of 2021 saw a significant run-up in inflation, negatively impacting business costs and chipping into margins across all industries. 

Tech and healthcare multiples on the rise

The increase in prices for assets has been especially significant in sectors such as technology. Between 2017 and 2021 the median EV-to-revenue multiple for tech buyout deals soared to 7.9x, up from 3.5x (Fig. 5). The rise in EBITDA multiples was even greater – median EV-to-EBITDA skyrocketed to more than 24x earnings, up from 12x just five years before. 

Healthcare is another sector that ran hot in 2021. In 2017 the healthcare sector deals had the highest median EBITDA multiple, at 13.3x, among its peers and second only to technology in revenue, at 2.2x (Fig. 6). Over the next five years the median revenue multiple more than doubled to five times enterprise value, while its median EBITDA multiples rose to 16.9x.

By contrast, pricing for business services and industrials look more reasonable: EBITDA multiples rose more modestly over the period, from 9.6x to 11.2x.

What’s the key takeaway for investors? More than ever, LPs need to monitor closely how their fund managers are investing. Funds bidding for portfolio companies in high-multiple sectors may find themselves overpaying. And in a softening economy, buyout exit values have struggled to keep up with entry prices. LPs will need to scrutinize the decisions GPs are making on their behalf with great care – which means access to the right data becomes all the more critical. 

The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.

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