Private equity: waiting for price expectations to align
In an overheated and uncertain market, PE investors are becoming noticeably more cautious in expectation of a market adjustment in the coming months, bringing buyer and seller price expectations closer into line.
A marked feature of 2019 has been the number of processes that failed to cross the line because sellers could not find buyers willing to pay rising multiples, which are commonly peaking at between 12 and 15x.
However, big deals do get done in this environment. PAI’s acquisition of Armacell from Blackstone, Vista’s acquisition of Accelya, from Warburg and KKR’s sale of LGC Group to Cinven, Astorg and ADIA, are proof of that.
But investors are worried about the impact of macroeconomic issues on the underlying performance of target companies, and there is also a growing concern about increasing competition and valuations.
Private equity investors are becoming noticeably more cautious in expectation of a market adjustment in the coming months, bringing buyer and seller price expectations closer into line.
On the U.S. side, fundraising continues to be strong, particularly at the larger, more established funds, and may surpass 2018 totals. While multiples are creeping higher (hence the elevated level of fundraising in anticipation of multiples possibly cooling), unspent cash has surged and total deal value will likely be below 2018 levels. Exits are lower since the IPO market remains uncertain.
It’s a pattern that repeats itself in European markets, which are increasingly tricky to read. Germany has seen some big deals – Bosch Packaging and ADCO, for example – which have attracted huge interest and gone through at breakneck speed – and Thyssenkrupp Elevator. At the same time, investors are holding off on other deals until they get a view of the economic outlook in 2020, although we are seeing a trend towards co-investment deals between PE funds and family owned “Mittelstand” companies.
Interest in P2P deals is growing, even though put up/shut up takeover rules in the UK are deterring some. But the failed Scout24 deal or the fight about OSRAM in Germany this year have left some feeling extremely wary, though many believe a successful DAX takeover is only a question of time.
Caution is also a watchword in Amsterdam due to various macro developments resulting in uncertainty among investors, although there is growing interest in this market from funds.
We do not expect the hiatus in dealmaking to last long and, unlike the years after the financial crisis, the correction this time will be buyer - rather than lender-controlled.
Funds have no intention of returning their huge amounts of accumulated dry powder to investors, but are waiting to put it to more innovative use, helped by the fact that investment deadlines are now more flexible than those of old.