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Quality over quantity - appetite returns for buyers and sellers of companies - Christopher Clark

Christopher ClarkOur latest Private Company Price Index (PCPI) shows that multiples for good quality private companies increased in 2010 and are likely to continue to rise this year, driven by interest from both trade and private equity buyers. In total 1,928 deals were completed in 2010, of which 83% were trade deals and 17% were private equity. Whilst the volume of deals is slightly lower than 2009 (2,174), there has been a shift away from ‘distressed’ deals to more ‘traditional’ transactions, focusing on good quality private companies.  

Private Company Price Index tracks the price/earnings (p/e) multiples paid by trade buyers of private companies. Highlights from the Q4 2010 report show that:

  • Multiples paid by trade buyers for private companies rose from average of 11.2 times in 2009 to 11.7 times in 2010
  • Multiples paid by private equity for private companies rose from 11.6 times in 2009 to 12.2 times in 2010
  • Manufacturing, business services and media & communications sectors accounted for more than half (51.8%) of all deals completed in 2010
  • Healthcare and education sectors experienced the fastest growth in deal volumes increasing by 26% from 2009 to 2010
  • The healthcare sector is expected to be the most attractive in 2011, particularly to private equity buyers
  • Energy and manufacturing are expected to attract higher valuations in 2011

There appears to be a greater focus by management teams on growing their business than the same time a year ago. Trade and private equity buyers appear to be gearing up to make further acquisitions and improvements in pricing are likely to tempt sellers back into the market.

Research also indicates that the steady improvement of multiples is expected to continue. Results from our Private Equity Survey 2010/2011 show that 24% of corporates and 30% of PE managers expect p/e multiples to increase by 10-20% 2011, while 58% of corporate and 62% of PE managers expect p/e multiples to increase by 10-20% in a year’s time.

It is clear that there is a greater appetite for quality deals at the right price. Increasing buyer confidence and a shortage of good businesses for sale has led to higher multiples, which in turn is fuelling optimism in the market.

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