2008 PE multiples bucking conventional wisdom?

BVWireIssue #64-3
January 23, 2008

In its annual “data dump,” PEWeekWire announced VC stats for Q4 and year-end 2007, derived from Thomson Financial and NVCA (National Venture Capital Association):

  • U.S. buyout deals. The announced deal value of 2007 was $468.7 billion, topping the $436.2 billion from 2006.
  • U.S.VC Deals.  Preliminary figures indicate more VC dollar disbursements in 2007 than in any other year since 2001. The current figure is about $26.59 billion, and may grow as more data become available.
  • Buyout-backed IPOs.  Only 32 buyout-backed IPOs were priced last year, raising $7.8 billion.  Compare this to the $14.8 billion raised by 59 buyout-backed IPOs in 2006.
  • VC-Backed IPOs.  A record 31 VC-backed companies went public on U.S. exchanges in Q4 2007, the highest quarterly total in seven years. They raised $3 billion and pushed the year-end numbers to $10.3 billion raised by a total of 86 offerings. In 2006, only 57 such offerings raised $5.12 billion.
  • VC-Backed M&A.  Only 45 VC-backed companies were acquired last quarter, the lowest since Q1 1998.  In 2007 there were 304 such exits with an aggregate disclosed value of $23.7 billion—a seven-year high.

Private equity outlook.  In a second release, PE ‘Wire cites new data from Citi Alternative Investments’ current Private Equity Outlook.  (Note: Research at the site appears to be limited to registered clients.)  With less leverage available, the study expects to see downward pricing adjustments, leading to lower “entry valuations” that PE firms pay for portfolio companies.  But so far in 2008, “Bain Capital offered a whopping 47% premium for Bright Horizons,” PE ‘Wire notes.  Two additional PE acquisitions this year have paid premiums from 32% to 36%.  In a broader context:

…Standard & Poor’s reports that the average 2007 purchase price multiple (vs. enterprise value) for buyouts was 9.33x.  That’s the highest-ever on record, and up from 8.04x in 2006.  Within those numbers, there was obviously a drop-off in Q3 and Q4, but not nearly so much as credit crunchers might expect. For deals of $500 million or more, it dropped from 10.56x in Q2 to 10.23x in Q3, and then dropped again to 9.56x in Q4.

Lastly, purchase price multiples for mid-sized deals ($250m-$500m) between Q1 and Q2 2007 increased from 9.09x to 9.31x before declining to 8.69x in Q4.  “So is the conventional wisdom wrong,” PE ‘Wire asks, “or is it simply lagging?”

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