Last week, Porter White attended the ACG Capital Connection in Atlanta with over 1,000 middle-market private equity professionals and other capital providers. The story we heard all last year continued – competition to invest capital and close deals has continued to drive up valuation multiples.
- Larger companies ($10+ million EBITDA) are garnering multiples of over 9x EBITDA (technology and healthcare multiples have been even higher) and smaller deals have been reaching the 7x-8x EBITDA range.
- Acquisitions of companies with less than $3M EBITDA have historically had a lot less competition from private equity groups, but increased competition in the $5+ million EBITDA range has pushed firms to pursue smaller deals.
Anecdotally, one private equity group bid 9x EBITDA on a deal and was too low to even get a management meeting. Another group has begun bringing an LOI (letter of intent) to management meetings to get ahead in the deal. It’s hard to raise a new $500 million private equity fund if you haven’t been able to invest much of the prior fund, and it is reflected in the pricing.
Another important takeaway from the conference is that there is a buyer for every type of owner and business, as long as it is well run. Most want control, but not all aim to operate the business. Most want growing profitable businesses, but some look for distressed businesses. Some of the risks facing small investors in private businesses (customer concentration, key manager risk, distressed financials, etc.) can be diversified away (or at least significantly reduced) by industry strategic investors and larger sophisticated private equity buyers who own (or plan to acquire) other businesses in the industry.
There is an overabundance of private capital looking at too few deals with limited time horizons, and as such, sellers are positioned to have very successful exits in 2015. If you know of a business that needs advice on its capital needs, please do not hesitate to contact us.