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Private Equity Squeezing Pricing Multiples in U.S. Buyout Market, Report

October 29, 2018, 07:07 AM
Filed Under: Private Equity

CEPRES released their latest analysis of the North American Buyout market revealing the changing dynamics in pricing multiples and value creation post-GFC (Global Financial Crisis).

By analyzing the 4,485 North America Buyout deals since 2009, CEPRES discovered the buy-sell pricing spread has been compressed, while both Entry and Exit Multiples have trended higher to achieve historical highs over the last decade. Multiple expansion is no longer a strong driver in value creation. It only contributed 15% to the valuation growth after the GFC, compared with 31% pre-GFC. Under the challenging pricing fundamentals, revenue growth has come to dominate as a driver of returns. Below the covers different sectors can be winners and losers showing a diverse pattern for different industries – Healthcare still provides strong multiple expansion and revenue growth contribution of 60%, whereas Technology sectors are dominated by the highest revenue growth expansion and suffer a drag effect from Margin Expansion.

Among the findings, Buy-sell pricing spreads compressed from 3.7 in 2009 to a low of 1.5 in 2014. Value creation heavily driven by Revenue Growth especially in the Tech and Healthcare sectors, though Healthcare is currently one of the best performing sectors generating gross pooled returns for investors of 30.6% since the GFC

"Tech companies are the greatest drivers of revenue growth," said Dr. Daniel Schmidt, CEO of CEPRES. "They often have very lower or negative EBITDA and thus massive entry price multiples. As they mature and become profitable through EBITDA growth, natural market pricing kicks in and their pricing multiples drastically reduce. A well-known public example is Amazon – post-IPO the low EBITDA led to massive PE ratios. As the bottom line came more into focus, the EBIDTA multiples reduced. Today Amazon has a very impressive PE ratio of 130, but that is over 90% lower than it was 5 years ago at 1,445."


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