Narrowing expectations
The
latest results from Q2 Private Companies Price Index (PCPI) show
that:
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• P/e multiples paid by trade buyers for private companies rose sharply to 10.8 (Q1: 9.0) bringing it in line with the Private Equity Price Index (PEPI) for the same period (Q1: 11.3)
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• The PCPI saw the number of deals fall 11.5% in Q2 to 371 deals (Q1: 419 deals) but remains ahead of the 330 deals announced in Q4 2010
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• On a half-yearly basis private equity deals have delivered a consistent performance with H1 2011 seeing 166 deals completed (H2 2010: 161 deals, H1 2010: 167 deals)
Chris Clark, BDO Corporate Finance Partner, comments: For two years, following the market peak in 2006/7, the price expectation gap between company buyers and sellers widened as sellers sought to maintain the high p/e multiples they had enjoyed previously (Q2 2007: PCPI 13.6, PEPI 17.8). However, over the last year the gap has been closing as expectations have become more realistic, as demonstrated by the strong correlation between the movements in the PCPI, PEPI and deal volumes.
Despite the prevailing economic headwinds, deal volumes over the last 12 months indicate that there is significant appetite to complete deals when they are fairly priced. Manufacturing deals, in particular, represent a notably high proportion of deals compared to the same point in the prior year. The overhang of private equity money raised during the boom years and the number of trade buyers focusing on acquisitive growth strategies, means that there are certainly deals to be done at realistic pricing multiples.
With stabilising deal volumes and lower volatility in pricing, the scene is set for the continued reduction in the price expectation gap between buyers and sellers. Following the PCPI and PEPI highs achieved during 2007 and the recession that followed, the price expectations widened hampering deal completions.
The return of the PCPI and PEPI to longer term averages has meant that while full price multiples are still being achieved for high growth businesses, price expectations are becoming less of a barrier to the successful completion of deals.
You can view previous PCPIs here.
