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PE DEAL MULTIPLES + TRENDSR E P O R T
G L O B A L
4Q 2015
DEBT LEVELSFLATLINE
Page 7
CLOSING TIMESDECREASE
Page 9
HIGH-ENDINVESTMENTMULTIPLES SLIDE Page 5
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CONTENTSIntroduction
Investment Multiples
Revenue Change
Debt & Equity Levels
Fees
Closing Times & Earnouts
4
5
6
7
8
9
COPYRIGHT © 2015 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.
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RESEARCH
EDITORIAL
SALES
3 PITCHBOOK 4Q 2015
GLOBAL PE DEAL MULTIPLES & TRENDS
IntroductionAs the year comes to a close, the old adage that the more things change, the more they
remain the same comes to mind. Many of the primary drivers of today’s dealmaking environment, covered extensively throughout the year, have only further manifested as 2015 winds down, looking set to remain in place for next year. Several defining trends of the landscape have been developing slowly for some time, such as the private equity industry’s collective hoard of capital commitments, the historic boom in M&A activity, and the continual evolution of investment strategies to growth via platform buildouts. The changes they have wrought in the investment landscape are still unfolding and will continue to do so, but there have also been more recent events that have introduced further complexities. The sudden upswing in volatility in August, compounded by uncertainties surrounding the growth of emerging economies, has produced a fair measure of wariness among investors worldwide that will continue to spawn ramifications into next year. In addition, there is one final event fraught with significance to occur: the first uptick in U.S. Federal Reserve rates in years. Even though long-awaited
and consequently planned for by investors, it will nonetheless signal the disparity in U.S. economic conditions compared to other developed economies and also prompt much fluctuation in capital flows, among other outcomes, only adding to the heady mix of variables to consider moving into 2016.
With so much to ponder, it’s instructive to take the pulse of the community at this point in time, producing a snapshot of expectations and assessments. Consequently, as we conducted our quarterly Deal Multiples & Trends survey and also delved into the PitchBook Platform for the latest deal multiples and breakdowns, we examined the influx of responses with interest to see what sentiments are trumping former concerns. Just a few samples: monitoring fees as a percentage of EBITDA dropped to the lowest level yet recorded in this report series, while equity levels have, as of late, leapt. In the following pages, we explore how those results, among many others, play into the general investment environment as of today. We hope you find them useful and informative. If you are interested in participating in future editions of the deal terms survey, please contact us at [email protected].
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Investment MultiplesMedian EV/EBITDA Multiples by Enterprise Value
Median EV/Revenue Multiple by EV
EV/EBITDA Multiple Breakdown
EV/Revenue Multiple Breakdown
Looking at activity through 3Q, median EV/EBITDA multiples continued to move lower,
coming in at 6.67x during the period, compared to 7.49x in 1Q and 7.86x looking back to 1Q 2014. Segmenting deals by size, we’ve seen volatile multiple activity in the lower ends of the middle market thus far. 1Q witnessed a massive hike in valuations sized from $0 million to $25 million to near 7x, driven by a few outlying transactions, yet leaving those out, 3Q saw a median EV/EBITDA multiple of 5.28x, the second highest level since 2012. With GPs sitting on massive levels of dry powder, investors have had to leave traditional strategies in search for better value
Source: PitchBook
Source: PitchBook
Source: PitchBook
Source: PitchBook
opportunities, found by dipping lower into the middle market. Valuations in that realm are not overly inflated on a historical basis, yet PE buyers are approaching that domain with a strategic eye, able and willing to pay heightened multiples for synergistic combinations supplementary to existing platforms. We’ve seen a similar trend in transactions valued between $25 million and $250 million, while valuations in $250 million+ deals saw multiples drop rapidly in 3Q. That decline is attributable to a decline in the quantity of quality assets that came to market in a period where both macroeconomic and public market uncertainties induce investors to reassess the current landscape.
Investment Multiples DefinitionInvestment multiples are calculated by dividing the enterprise value of the portfolio company by either the TTM EBITDA or the TTM revenue at the
time of the transaction.
0x
2x
4x
6x
8x
10x
12x
14x
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
All $0-$25M $25M-$250M $250M+ 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015<0x 0x-2.5x 2.5x-5x 5x-7.5x >7.5x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
All $0-$25M $25M-$250M $250M+ 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 20150x-0.5x 0.5x-1x 1x-1.5x 1.5x-2x >2x
5 PITCHBOOK 4Q 2015
GLOBAL PE DEAL MULTIPLES & TRENDS
Revenue Change
Even in a dealmaking landscape rife with competition, PE investors are finding targets where
operational expertise can be put to play. Respondents reported 20% of targets in 3Q had unchanged revenues, the largest proportion in our dataset. But pairing the considerable proportion of companies with growing revenues that were acquired in 3Q with the uptick in responses indicating they expected no change in the next 12 months, caution still seems at the forefront of investors’ minds. Although minuscule, the proportion
of respondents that anticipate a decrease of more than 10% in revenues over the next year increased from 2Q. Even if the U.S. economy is outperforming somewhat, global growth remains glacial, if even present on the whole, although in certain sectors, such as healthcare services, prospects are rosier. Having multiple add-ons lined up can blend down the cost of initial platform investments, but are not immediately accretive in terms of growth; expectations around immediate revenue growth are consequently being dialed back somewhat.
Revenue Change 12 Months Prior to DealAnticipated Revenue Change 12 Months Following Deal
Source: PitchBookSource: PitchBook
EV/Revenue Multiple by TTM Revenue Change (2013-3Q 2015)
EV/Revenue Multiple by Anticipated NTM Revenue Change (2013-3Q 2015)
Source: PitchBookSource: PitchBook
The charts above show the average and median EV/revenue multiples based on the company’s revenue change over the 12 months prior to acquisition and the investor’s expectation for the company’s revenue change in the 12 months following acquisition.
0%10%20%30%40%50%60%70%80%90%
100%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
Decreased < 10% Decreased > 10% UnchangedIncreased < 10% Increased > 10%
0%10%20%30%40%50%60%70%80%90%
100%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
Decreased < 10% Decreased > 10% UnchangedIncreased < 10% Increased > 10%
0.6x
1.4x
0.5x
2.5x
3.1x
2.6x
Decreased
Flat
Increased
Average Median1.2x
1.3x
1.0x
1.9x
1.8x
1.9x
Decrease
Flat
Increase
Average Median
6 PITCHBOOK 4Q 2015
GLOBAL PE DEAL MULTIPLES & TRENDS
Debt & Equity Levels
Similar to what we’ve seen through 2015, median debt levels have remained lower relative to some
of the near 60% levels in certain quarters in 2013 and 2014. Regulators concerned about overly leveraged transactions and unhealthy corporate debt levels have continued to dampen the relative amount of debt used in PE buyouts, however, there remains plenty of debt available at favorable rates for quality targets in the market. While access to debt may have been easier to secure in recent years, companies coming to market with financial weaknesses are beginning to be scrutinized more now, leading to hangups in the debt portion of certain deals.
Equity levels have jumped noticeably, accounting for over 51% of transactions in 3Q compared to 38% in 2Q, reinforcing those points. Further, lenders are unsurprisingly looking to remain higher in the capital structure to mitigate negative effects of potential defaults, with senior debt accounting for 30.5% of all deal amounts in 3Q, and non-senior debt accounting for 18.3% during the same period. Moving forward, we can expect more of the same, with higher equity portions likely remaining in place, with the exception of top-tier assets still able to handle relatively higher debt levels.
Median Debt Levels Median Debt Levels by Enterprise Value (‘12-3Q ’15)
Source: PitchBookSource: PitchBook
Average Debt-to-Equity Breakdown
Note: PitchBook receives varying levels of detail regarding the debt used in deals. Some of the charts on this page utilize a subset of our data that contains additional details. In addition, some charts are displaying median debt levels while others show average debt levels. This explains any discrepancies that may be noticed between the charts.
Source: PitchBook
53%
47%
50%
59% 60% 59%
58%
59%
54%
57%59%
46% 46%
50% 50%
45%
50%
55%
60%
65%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
54%55%
51%
59%
45%
50%
55%
60%
65%
All $0-$25M $25M-$250M $250M+
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
2012
2013
2014
2015
Equity Senior Debt Non-Senior Debt
2Q
2Q
2Q
2Q
4Q
4Q
4Q
7 PITCHBOOK 4Q 2015
GLOBAL PE DEAL MULTIPLES & TRENDS
What could eventually produce a significant shift across the PE industry with regard to fee structures is how well the industry performs in comparison to public market equivalents. Given PE’s success as an asset class overall in the past, LPs have been plowing plenty of capital back into PE firm coffers in hopes of repeat performance, but as we have reiterated many times, that has contributed to the difficulties dealmakers face nowadays, heightened valuations and a superabundance of dry powder in particular. Both of those factors have the potential to depress returns, as some prominent figures have noted. With public markets as high as they were in recent years, it’s been difficult for PE fund managers to replicate previously outperforming returns. Hence the shift in strategies by certain fund managers, such as Blackstone, to raise pools of capital with atypically long investment horizons; others may follow suit, expanding the diversity of their offerings in order to adapt to today’s dealmaking environment. Less-proven firms could be lowering fees in order to attract commitments from investors, as LPs, well aware of the difficulties GPs are encountering, have been playing it safe and pursuing larger, more proven firms. Accordingly, fees could potentially dwindle to a new normal, although such a transformation would likely take some time and the new equilibrium won’t likely be drastically different. PE firms demand a premium of sorts given their ability to preserve value through volatile swings in the public markets.
Median Monitoring Fee as a % of EBITDA
Source: PitchBookSource: PitchBook
Source: PitchBook
Median Transaction Fee as a % of Deal Value
3.5%4.0%
3.0%
5.0% 5.0% 5.0%
3.3% 3.5%
4.2%4.5%
4.0%
3.0% 3.0% 3.0%
2.0%
0%
1%
2%
3%
4%
5%
6%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
3.4%
2.0%
3.0%
2.0%
2.8%
2.0%
3.0%
2.0% 2.0%
2.3%
1.5%
2.0% 2.0%
2.5%2.3%
0%
1%
2%
3%
4%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
FeesFees remain a topic of contention across the industry, however mild or slow the tenor of the debate.
Whether or not substantive change will occur remains to be seen, but it’s clear that fees overall have been trending downward. The percent of transactions with deal fees has been, by and large, sliding downward, dipping once again from 2Q to 3Q after appearing to plateau somewhat. As a percentage of EBITDA, median monitoring fees saw the lowest level yet recorded in 3Q, while transaction fees seem to have flatlined, hovering around 2.0% or slightly above for several quarters now.
% of Transactions with Deal Fees
100%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
Transaction Fees Monitoring Fees
8 PITCHBOOK 4Q 2015
GLOBAL PE DEAL MULTIPLES & TRENDS
Closing Times & Earnouts
% of Deals with Earnout Provisions
Source: PitchBook
Transactions by Weeks to Close (#)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
<5 wks 5-9 wks 10-14 wks 15-20 wks >20 wks
50%44%
36%
40%
31%
39% 41%
38%
39%
33%
39% 41% 41%
32%
43%
0%
10%
20%
30%
40%
50%
60%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
2012 2013 2014 2015
Source: PitchBook
Over the past several quarters, the percentage of deals that took longer than 20 weeks to close has
steadily diminished, with 3Q seeing a sudden resurgence in the proportion of transactions that concluded in less than five weeks. That spike may well be due to the end of the year approaching, yet, it is quite greater than that seen in the back halves of years past, so current market conditions likely have something to do with it. Sellers may well be taking advantage of current valuations, fearful of the sudden, recent emergence of volatility potentially leading to a downturn, and consequently signing off on deals faster. Despite the fact the expected rate hike is unlikely to have much of a material effect on investment conditions—having been long awaited and, when all is said and done, gradual and infinitesimal—buyers may also be hasty to close purchases as well, before the first significant change in lending markets in years happens.
Another interesting development is the surge in the percentage of deals with earnout provisions. At 43%, the proportion is the highest it has been since 2Q 2012, although the disparity between that figure and recent numbers is not dramatic—a mere 1%. It should also be noted that, as with any survey-generated dataset, one should not read too much into quarterly shifts. The rise is indicative, however, of growing differences between buyers and sellers. The fact no less than 43% of deals in 3Q had earnout provisions—according to survey respondents—suggests investor caution is on the rise, with buyers seeking to render initial heightened purchase prices more palatable by building in payouts contingent on future performance. With a fair amount of volatility still present in accompaniment of sustained high multiples, as well as significant concerns around growth in plenty of key regions, such apprehension is warranted. It could also reflect the quality of the typical company in the market. PE firms aren’t going to pay current multiples for a target deemed unsuitable, but in today’s highly competitive landscape, they may well be resorting to closing purchases of companies that are less than ideal. Earnout provisions may well be more in vogue now, accordingly, as investors seek to hedge against downturns potentially in the offing.
With a surge in earnout provisions, caution appears to be on the rise.
9 PITCHBOOK 4Q 2015
GLOBAL PE DEAL MULTIPLES & TRENDS
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178.50
59,700.00
516,206.00104,300.00
405,900.00
24,700.00181,980.00
13,919.80
25,900.00
8,040.00103.35
178.50
5,916.00
516,206.007,800.00
405,900.00
24,700.0018,371.00
8%
12%22%17%
42%
12%
7%8%
4.5%
7.3%10%
Albany, NY
Harrisburg, PA
Harrisburg, PA
Basking Ridge, NJ
New York, NY
Boston, MA
New York, NYAlbany, NY
Bloomfield, Ct
Springfield, MA
Quebec, Canada
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New York State Teachers Retirement System Public Pension Fund 308 126 104,300.00 7,800.00 8% Albany, NY
Bell Atlantic Master Trust Corporate Pension 333 157 103.35 103.35 17% Basking Ridge, NJ
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