Private equity puts companies back into debt

With these words, the FD headlines February 24, 2020. According to independent research by McKinsey, financing for an average of 6.6 times gross operating income is raised for investments by Private Equity parties. This while the average multiple on gross operating income is 11.9.

You may think this is good news if you are an entrepreneur planning to sell your business in 2020, but beware, don’t count yourself rich! These impressive numbers apply to the U.S. market. In Europe and also in the Netherlands, these numbers are yet again lower. Moreover, this is an average in the U.S. market. This concerns both large and small transactions. In general, the larger the size of the transaction, the higher the multiple. Companies’ growth expectations also play a role. The U.S. economy is booming and companies are taking advantage of this.

 

Dutch multiple much lower

On average, Dutch transactions will have a lower multiple. There will also be a lower multiple on the financing that is obtained. Brookz magazine has been researching multiples for years. The figures available for 2019 show a multiple of just under 5 for Dutch SMEs. So these figures do not make the front page of the FD and the differences are enormous. However, there is an upward trend in the multiple in the Netherlands if we follow the developments of recent years.

 

Availability of money

It is said by many that companies are again easily overvalued. Whether this is caused by the Private Equity parties involved in these transactions, I question. Private Equity parties operate in a competitive market. Other buyers also pay a lot of money to buy a good profitable company.

As a reason for the price drive, it is stated that there is a lot of money available in Private Equity. Money that must be spent and investments must be made for that purpose. That in itself is true, but the assumption that more is being paid by Private equity as a result is too quick a conclusion. The return requirements could perhaps be lower in the current era and yes at maximum leverage, returns are easier to achieve.

With interest rates so low, it seems logical that transactions are rigged with more financing and some higher multiples can be paid. But there are other factors as well.

 

Growth a key driver

Another important factor for the higher multiple is corporate growth. Apparently, strong growth in corporate profitability is anticipated in America. Given the current political and fiscal situation, this does not seem entirely surprising. Whether the Corona virus will throw a spanner in the works, we do not yet know.

 

Don’t count yourself rich just yet

Should you want to sell your company, do not count yourself rich with the figures from America. The average multiples in Dutch transactions are really much lower.

As a seller, you must therefore make the right assessment when valuing your own company: am I in an attractive market that is growing, do I have sufficient size to be an attractive target for Private Equity parties and, finally, have I achieved sufficient profitability from the company. In short, is the company ready for sale? Only then are you likely to realize a higher multiple. But don’t be fooled, buyers from Private Equity can do good math. This money must all be recouped.

By |2022-11-14T10:04:46+01:00February 26th, 2020|Blog|Comments Off on Private equity puts companies back into debt

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