Private equity valuations in Europe are slowing, and the reason why is still up for speculation. Some suggest that the breather in valuation growth stems from a slowing European economy; others suggest it has more to do with the private equity industry’s value proposition compared to competing financial investments. A look follows.
Background
The following figure is private equity (PE) deal activity in Europe from 2009 through September 30, 2019. As of writing, Pitchbook reports PE deal value at about €306 billion. This value stems from an estimated deal count of 2,678.
These figures put European PE deal activity and value off the pace of reaching the boom figures reached in 2017 and 2018. In 2018, total PE deal value reached €467 billion on 3,939 deals. In 2017, total deal value reached €422 billion on 3,973 deals.
Deal Multiples
The healthy, but moderating PE activity is seen easily in the deal multiples. The following figure is the rolling four-quarter median PE buyout Enterprise Value (EV) per Earnings Before Income Taxes and Depreciation Allowance (EBITDA). In the first quarter of 2016, the EV/EBITDA was 9.3x. The EV/EBITDA stayed around this level for the next couple of years.
Then, conditions picked up. Beginning in the second quarter of 2018, deal multiples, as measured by EV/EBITDA, rose to reach a peak of 11.9x in the first quarter of 2019. Since then, deal multiples have moderated. In the second quarter of 2019, the deal multiple dropped to 9.9x. According to Pitchbook, the deal multiple dropped again in the third quarter of 2019 to a two year low of 9.4x. The lowest reading of the past three years was 8.7x in the third and fourth quarters of 2016. Deal multiples appear heading in that direction.
What is Behind the Breather?
With deal multiples in Europe taking a breather, the obvious question among observers and insiders alike is – why. Some suggest that the slowdown in deal multiples stems from a slowing European economy. Others suggest that the slowdown may stem from competition from other financial sectors.
The answer to the question is, of course, unknown. All private equity professionals and observers can do is speculate on what might be causing the breather.
Conclusion
Private equity activity in Europe is taking a breather after some very strong readings in 2017 and 2018. Deal multiples are down to 4.7x for Debt/EBITDA and 4.7x for Equity/EBITDA. These put the EV/EBITDA at 9.4x, down from the 11.9x EV/EBITDA in the first quarter of 2019. Speculations abound on what is causing the breather in the decline in multiples.
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