Valuation interpretations

Private equity buyers became accustomed to company valuations that showed seemingly limitless capacity for growth during the heady days of the buyout boom. The liquidity in the credit markets provided a platform that allowed firms to match spiralling prices without committing to substantially larger equity tickets, and the heated competition for assets consistently delivered lucrative returns for those exiting their investments.

The collapse in the credit markets and subsequent downturn in the global economy has changed things considerably however. According to a survey conducted by BDO Stoy Hayward, a staggering 96% of private equity managers believe that the prices the industry will pay for assets has reduced. The survey, which gathered responses from 13 mid-market private equity firms and over 100 portfolio businesses, also showed that opinion is divided on how far valuations have fallen. 36% of respondents claimed that there has been only marginal declines of between 5% and 10%, while 27% suggest drops of more than 20%.

According to BDO partner Alex White, this uncertainty is affecting the confidence of investors, particularly those seeking to exit their investments: “Behaviour is driven by uncertainty and people are now putting sales on hold because the market is divided on value,” he says. Indeed, 91% of respondents stated that hold periods are increasing, while 71% admitted that they have already delayed an exit process in 2008.

Many are also now adopting more acquisitive growth strategies in order to build value prior to exit, with 51% of private equity-backed companies answering that they expect to make bolt-on acquisitions in the future.

This, though, is not unique to private equity; trade buyers seem equally as keen to use strategic acquisitions to increase value. In addition, unlike their counterparts, trade buyers are not perceived to have significantly dropped the amount they are prepared to pay, with 64% of private equity firms stating that there has been either a marginal decline or no decline at all.

This raises serious questions regarding the competitiveness of private equity in the current market, particularly given the difficulties in securing debt financing. Investors are having to put more cash into deals in order to match trade buyers and unless they can confidently assess the long term value of an asset they are likely to remain cautious.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Investments
• UK / Ireland