(Charlotte, NC – February 6, 2018)
Comparing EV/EBITDA multiples between Private Equity and Corporations.
The chart below summarizes deal volume and multiples paid by private equity and corporate buyers across select industries for the last 20 years. Corporate acquisitions have exceeded those of private equity in volume but, while average multiples paid by corporate acquirers have remained the same before and after the financial crisis, average multiples paid by private equity have increased from 8.1x before the financial crisis to 10.1x afterwards.
Source: North Inlet analysis of Capital IQ data. Data includes closed acquisitions of U.S. companies in the following industries: Materials, Industrials, Consumer Discretionary, and Consumer Staples.
Structural, economic, and demographic shifts over the past 20 years have contributed to lower growth, lower inflation, and lower interest rates. While growth and interest rates have declined, capital available for investment has increased. We illustrated the build up of private equity dry powder in our last newsletter.
Dan Roth, Managing Director at IBG Business, notes that many private equity firms have established a track record proving they have a unique ability to acquire businesses and then operate those companies for 3 to 5 years in a manner that significantly increases the valuation of the business. Businesses owned by private equity outperform peer group competitors and increase the value compared to the original acquisition purchase price.
So, if private equity firms already capable of increasing the target valuation over time are now capable of paying a higher multiple, how should corporate buyers compete for quality targets?
Our next newsletter series will answer that question by highlighting five practices private equity implements during their M&A process:
1. Much Research
2. Exit Planning
3. Leverage and Cash Flow
4. Systems Upgrade
5. Portfolio Building
Our goal is that Corporates can borrow and/or adapt these practices to work for them.
North Inlet Advisors, LLC provides financial advice to companies on capital formation, mergers, acquisitions, divestitures, restructurings, and other complex corporate transactions. North Inlet Advisors is not a retail broker-dealer, does not conduct underwriting activities, provide research, analyst reports, or solicit or carry accounts, or offer or sell securities products to retail customers. North Inlet Advisors is registered as a broker-dealer with the U.S. Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority (“FINRA”) and Securities Investor Protection Corporation (“SIPC”). Please visit www.finra.org and www.sipc.org, or North Inlet’s regulatory webpage for more information.