What is the view on valuations and stage of the PE cycle in Europe?

December 12, 2018

by a searcher from IE Business School in 28045 Madrid, Spain

One US searcher who bought his company at start of 2017 tells me he thinks the market is now crowded and there are too many funds competing with micro PE over the same low quality deals. He feels it is prohibitively late in the cycle for search funds to make sense right now in the US.

This tallies with conversation with a guy who had raised a small PE fund over the last couple of years who said he has had to return money to investors, as he just feels valuations are too frothy right now.

Do you agree? Is it different in Europe vs US? Is now a bad time to be buying but maybe a good time to be raising?

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Reply by a professional
from Babson College in Portland, ME, USA

I'm still impressed with the valuation multiples that I've seen in the U.S. search fund space. And by that I mean that they still feel reasonable and justifiable. I'm basing that on projects I've done due diligence on and discussions at the various conferences. I'm sure the trend over time is up, and to anyone that historically bought in at lower valuations (perhaps 3x-5x EBITDA) people buying at 5 or more seems crazy. It is also possible that the multiples are actually creeping higher than I'm aware (I did hear a range of 8x EBITDA thrown out at HBS), and at some point the unique non-diversifiable risk of a search fund acquisition needs to be accounted for but there will be theoretical arguments for acquisitions right up until they hit 11x-14x (the average EV/EBITDA for a company in the S&P index).

I can't add much on Europe. A small distressed hedge fund that I was principal of did invest in the UK and I can't say I ever felt the space was less crowded than the U.S. But that was just my gut feeling.

Reply by a searcher
from IE Business School in 28045 Madrid, Spain

Thanks Brent. I'd have thought buying at 8x EBITDA was very frothy but I guess there will always be a range depending on growth trajectories and potential etc.

Perhaps every deal is so idiosyncratic that broader frameworks are difficult to use but would be interested to know if the institutional investors in the space perhaps use rules of thumb linking growth trajectory to different levels of multiple, where their "red lines" are at this point, whether these have evolved over time and the reasons for that evolution etc.

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