The private equity group Argos Wityu has published its latest H1 2018 valuation index for mid-market transactions in the Eurozone, which shows that average valuations have reached a new high @ 9.9x EBITDA. This record level has been supported by economic growth, low interest rates, high levels of cash reserves at large acquisitive groups, and record amounts of dry powder available at Private Equity (PE) funds.
It’s noteworthy to mention that transaction volume actually decreased in H1 2018, reaching its lowest point for the last 10 years, following a general trend of stable volumes over the last three years. This is not indicative of a market top, as we saw when volume peaked in 2007 and 2008, but rather evidence of a market environment in which the number of attractive targets is limited. Buyers remain selective, and valuations are rising.
What we are witnessing on the ground:
- Appetite for acquisitions among both financial investors and corporates is increasing. PE in particular are increasingly active in running buy & build strategies. These astute acquirers are aiming for their portfolio companies to accelerate growth, strengthen geographic footprints, create synergies, and to increase their returns as ‘smaller is cheaper’ (acquiring small-cap assets and then rolling them into larger portfolio companies delivers immediate valuation benefits). Large-cap PE portfolio companies are definitely our best buyers in the current market environment: they boost demand for these assets, pay the highest valuations, execute rapidly and have access to excellent financing facilities.
- That said, all acquirers remain very selective and are oftentimes chasing the same quality value-added assets, while the number of targets positioned in these desirable markets and with good management teams remains limited. More specifically, PE firms are favouring assets with resilience, differentiation and double-digit-growth stories, while corporates are chasing assets that deliver technology, differentiation and talented employees and know-how. Corporates are no longer acquiring to simply increase market share.
- It is becoming more difficult to sell companies with limited value-adds, especially for those playing in cyclical, CAPEX intensive and/or pressured industries. Buyers are seeking targets that tick all the right boxes (sector, margins, growth), and avoiding those that don’t. The automotive market is a prime example of a sector which hardly ticks the boxes, and where buy-outs are virtually non-existent. As such, transaction multiples for the mid-market automotive suppliers (excl. electronics & software) typically stand at 4 to 5x EBITDA.
- Debt financing solutions are increasingly accessible to the mid-market and also highly competitive as banks are competing with a growing number of debt funds of all types. This is an important positive tailwind, supporting valuations.