PE and trade players neck-and-neck on mid-market pricing

Private equity firms had been paying a slightly higher entry multiple for lower mid-market businesses (here defined as assets valued in the €15-150m range) since the third quarter of 2012, but the first few months of 2013 have seen both buyer groups find a common ground on pricing.

Private equity houses paid a median multiple of 6.6x EBITDA in Q1 this year, down from 7.1x for the three months ending in December 2012. The median multiple paid by industrial buyers, meanwhile, moved ever so slightly upwards from 6.3x to 6.5x.

"The continued stock markets recovery has led to increased M&A activity from listed businesses, which in turn has driven up multiples slightly," Argos Soditic president Gilles Mougenot (pictured) told unquote". Listed businesses – notably those based outside Europe – have indeed been accounting for an increasing proportion of buy-side M&A activity across the Argos sample in the past six months, to settle at 56% of all transactions.

But despite a still lacklustre private equity dealflow in the first quarter of 2013 (see the latest unquote" Private Equity Barometer), entry multiples paid by buyout houses are still roughly on par with those seen for the best part of 2012. "Private equity houses are still focusing on the best assets available," notes Mougenot. "Despite a slight drop in this past quarter, entry multiples paid in LBOs therefore remain close to those seen in corporate M&A transactions."

Vicious circle
Mougenot believes multiples paid in LBOs will not go down significantly until the sizable backlog of unrealised boom-time investments gets addressed: "Holding periods are getting increasingly longer for private equity-backed businesses. There is therefore a good amount of potential secondary buyout opportunities, but it would probably be fair to assume that the average attractiveness of these unrealised investments is lower than that of the assets sold in recent weeks."

This last point could be a deal breaker for private equity backers eager to maximise returns, according to Mougenot – and a thawing of the market could still be some time away. "If these potential SBO opportunities were to finally come to the market, entry multiples should mathematically go down," he says. "But knowing this, sellers are understandably reluctant to let go of these assets, feeding a vicious circle that makes it hard for the market to reach a point of balance."

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