Video: Mapping out European entry multiples

With business confidence returning in 2014, thanks to cheap credit and a more stable macro environment perceived throughout Europe, private equity firms have been enjoying a healthy exit market, generating impressive returns and returning cash to investors.

However, when it comes to putting money to work, GPs are facing an unfavourable supply and demand dynamic as a surplus of capital chases a dwindling number of opportunities. For business owners, this means there are now more options than ever, thanks to a competitive private equity industry, a buoyant alternative credit market, savvy family offices and high-net-worths as well as trade buyers sitting on strong balance sheets.

For private equity houses competing in processes, plentiful and cheap debt has caused some to be more aggressive on price, while still sticking to their equity sweet spots. This kind of activity only leads to further price increases, especially as in the private debt markets, more players are chasing higher leverage
ratios and lower rates of returns.

European private equity's engine room - the mid-market - has witnessed the bulk of this activity as it is one of the most over-crowded segments of the industry. This is compounded by the fact that often GPs are unable to shift strategies on existing funds as a means of mitigating escalating prices. For some private equity firms, particularly those that have recently closed funds, the safest option is to exercise restraint and wait for the market to settle down.

However, others who are more uncertain as to whether a correction will come about, or who are under time pressure to put money to work and wrap up funds, are having to swallow higher prices. While this is clearly not private equity's preferred method of investing - GPs have long prided themselves on being able to unearth value in hidden gems - some are clearly taking the view that paying higher prices is necessary for quality investments.

Despite this recent trend of shelling out more cash for quality assets, GPs remain disciplined in terms of selection, focusing in on assets where private equity can genuinely bring value and picking those companies best suited to the team's experience and skills.

It is against this ever-challenging background that unquote" in partnership with Clearwater International has launched its Multiples Heatmap. This first instalment looks back over the changing environment of these past 18 months in order to determine where value can still be unearthed, and which sectors are
offering best value.

The overall aim of this partnership is to bring together a community of mid-market investors and, through the sharing of information, more efficiently navigate the increasingly competitive markets and ensure private equity continues to deliver outsized returns for investors. 

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