Member Article

Debt financing gap sees private equity deals dip

A dearth of debt to support transactions hit the values being paid for private equity deals hard in the first three months of 2013, according to BDO’s latest Private Company Price Index/Private Equity Price Index (PCPI/PEPI).

The index, which compares the EV/EBITDA ratios being paid on the sale of private companies to trade (PCPI) and private equity (PEPI) buyers, showed a sharp contraction of the values paid for private equity deals of 36% from 12.0 in Q1 2012 to just 7.7 in Q1 2013, its lowest point since Q4 2009.

At the same time, the number of private equity deals tumbled 25% when compared to the same period in 2012 (72 deals compared to 96) and stood at their lowest level since Q2 2011.

Yet while private equity continues to suffer, trade buyers are prepared to pay higher multiples to fund strategic acquisitions and drive growth; the PCPI Index rose by 5% to 8.5 in Q1 2013 from 8.1 in Q1 2012.

This was against a backdrop in which deal volumes also fell, but not nearly as sharply as for private equity-backed companies (3% from 442 deals in Q1 2012 compared to 429 during Q1 2013).

BDO LLP’s Q1 research reinforces a trend which started in Q3 last year whereby private equity funds are struggling to complete deals while trade buyers continue to chase strategic acquisitions unabated.

However, a growing bright spot for private equity funds is the pickup in IPO activity as the stock market has become a more attractive place for deal activity.

Jason Whitworth, M&A partner, BDO Yorkshire, says: “As we have been predicting the public markets have begun to return as an exit option for private equity funds.

“If the markets remain calm this would facilitate further profitable exits at the bigger end of the scale.

“In the mid-market, we have seen a renewed level of interest by private equity in sectors such as leisure, particularly in the specialist side of the market such as high-end holidays.

“Meanwhile, advances in cloud computing have stimulated a real bounce back in technology M&A with both private equity and trade buyers keen to play a part.”

This was posted in Bdaily's Members' News section by Mark Lane .