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So you think company valuations are low? - Alex White

Alex WhiteThere are fewer company vendors around, due in part to the perception that there aren’t any buyers or values are too low and prices may be better in a few years. This could be entirely the wrong call. There is some £100 billion of uninvested private equity commitments in Europe but the clock is ticking – these funds need investing and they will not last...  There are four reasons, hard wired into the structure of PE funds that mean the pressure is on to get money out the door:

 

  1. PE funds have finite lives. After five years underlying investor commitments fall away and the PE manager’s management fee income will fall. Can’t have that...
  2. PE managers ‘buy to sell’. If they haven’t invested they can’t earn a share of the returns. Can’t have that either
  3. If PE managers can’t invest a fund in five years they will not be able to raise another fund of similar or larger size
  4. When you are a deal doer, not doing deals is boring

So what?

Well, with volumes low the pressure on private equity to invest is getting acute and in fact this is resulting in excellent prices being paid for investment ready businesses.  Quite simply demand for new deals is outstripping supply. The trouble is this may not last and in a few years we will enter a period where funds will have been invested or time barred and the current overhang of old private equity money will fall away. In addition with new fundraising in the last few years at 10 year lows there will be a lag in new funds coming online. If that happens then the current pressure to invest falls away too and pricing could even dip for a period - even as Europe’s economy recovers.

Of course there are many factors at work which affect company valuations, and these will vary from time to time and sector to sector but the private equity dynamic which is now propping up valuations should give owners with a two to three year exit horizon food for thought.  Some may wish to re-analyse their options which could include bringing forward their sale plans.

For more information on what is happening in private equity have a look at the 2012 survey of PE managers and portfolio company attitudes.

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