Investment Activity

Let’s not kid ourselves and think it’s only the limited partners who have been wringing their hands and playing the part of Hamlet, adrift in indecision, where to invest, how to commit, preferring to do little.

Purchase Price Multiples at Acquisition

median ev/ebitda by deal year

Investors are fixated on purchase price multiples. This chart is trotted out at bars, cocktail parties, libraries and bowling alleys and discussed as to what it means for returns and life in general. We are not oblivious to the importance of purchase prices. If you pay too much, it’s hard to make any kind of return. Ah, but what is too much? That is a vexing question. Right now, multiples in the private markets are at record levels in Europe and Asia and close to that in the U.S. More importantly, they are now higher than what is found in the public markets. How rare is that occurrence?

MSCI World Buyout Deal Purchase Price Spread

Really, super-duper rare, particularly by the degree to which it is now. The time it happened in 2018 was actually a decent time to buy, but we are in new territory, and this is a very common reason investors are citing to avoid private equity investing. Perhaps.

One reason we have been sanguine on both the increase in purchase price multiples and the impact of higher rates on portfolio company operations is the chart below and what it means.

Buyout Deals % Equity Contributed

MEDIAN BY DEAL YEAR

This, dear readers, is the most important chart in this overview. Why? Because it tells you why we are unlikely to see a repeat of the 2002 or 2007 era of buyout returns. The amount of equity that is being invested into deals is higher than it’s ever been. That doesn’t mean that returns are going to be great. Though they might be, who knows? What it means is that there is so much more equity cushion in deals that the downside risk of loss is diminished. This means more safety for your credit exposure, greater likelihood of general partners supporting companies given their equity levels, and generally fewer wipeouts in portfolios.