Pitchbook’s report Exploring European Buyout Multiples published on 5 April analysed the differences in buyout multiples, as well as the drivers behind returns and how the macroeconomic environment may have an impact.
Here are some key takeaways from their report.
Divergences between the US and Europe
Analysts found that purchase price multiples for leveraged buyouts (LBOs) are diverging between the US and Europe. European private equity buyout multiples declined in 2022, while these trended higher in the US thanks to increased competition, larger investor pools, more stimulus (which artificially boosts multiples) and a strong technology sector.
“We don’t expect the divergence between European and US multiples to persist in the medium term, as we expect US multiples to contract like those in Europe given the similar trajectory imposed by their respective central banks. That said, the US may always trade at a slight premium to Europe given the higher contribution of its tech sector,” said Nicolas Moura, EMEA private capital analyst. “However, the gap will tighten and move in tandem rather than opposite directions. A contraction in multiples has been looming for years, and this shift in monetary policy seems like the inflection point for lower multiples moving forward.”
The report noted that the US represents 60% of global private equity assets under management, and is almost three times larger than in Europe. More competition means that it’s more likely for higher multiples to be obtained in deals, said Pitchbook’s report.
EV/Ebitda stands for enterprise value (EV) divided by earnings before interest, taxes, depreciation and amortisation (Ebitda), a measure of profitability. The ratio represents the value of a company.
Information technology drives buyout multiples higher
The United States dominates the tech sector, noted the report, which is another reason that multiples trended higher in the US than in Europe. EV/revenue multiples peaked in Q4 2022 at 3.7x, while Europe has seen a drop in multiples since the first quarter of 2022, stabilising around 2.3x at the end of the year.
IT is one of the sectors that drives buyout multiples higher, noted Pitchbook’s report. EV/Ebitda also saw the same trend. The US generally has higher multiples than in Europe thanks to its tech-heavy industry, “which tends to fetch multiples from 15x to 30x and represents the bulk of US multiples.”
EV/Ebitda values vary amongst sectors, but high EV/Ebitdas can mean that there is a potential that the company is overvalued.
Pitchbook analysts forecast that the technology sector will continue to be the dominant sector and drive buyout multiples, pushing the median higher. However, “in the short term, we do expect to see the median level of multiples come down from an elevated base caused by a 12-year bull market,” said the report.
Healthcare sector also pushes multiples higher
The emergence of the covid-19 pandemic has highlighted the importance of healthcare systems to be digitalised and data-driven, said the report. Private equity sponsors have helped push multiples higher.
Private vs public multiples
Public multiples are traditionally higher than private multiples because of the liquidity and transparency that public markets offer investors. However, the private equity asset class has “boomed” in recent years, noted the report, driving private market multiples higher, while companies are preferring to remain private during the current downturn environment, thus avoiding public market volatility in valuations.
Pitchbook analysts, therefore, expect private equity as an asset class to continue growing as it becomes more accessible to different industry players. They also anticipate that PE will start dictating buyout multiple levels, and expect the gap between public and private multiples to converge.
Shifting drivers of buyout multiples
According to the Pitchbook report, “there will be greater emphasis on driving returns from Ebitda.” The private equity industry appears to be at an “inflection point,” where limited partners will likely shift towards managers that can “generate added value from Ebitda growth and not just from multiple expansion and deleveraging.”
High interest rates and wider credit spreads can negatively impact multiples. Though Pitchbook believes “we will continue to see high multiples being paid at the top of the segment for treasured assets, where competition and auctions will be driving individual price tags higher,” they also expect that most transactions within smaller deals will get lower multiples. This will bring the median multiple lower during the current cycle of tightening monetary policy.
Read the full Exploring European Buyout Multiples report here.