Private equity pays up

There are many different yardsticks for measuring the burgeoning profile of private equity. One might take into account, for example, the number of high-profile public companies coming into contact with private equity firms for the first time. Another measure is the amount of attention now being given to the asset class by the media, politicians, unionists and regulators. Arguably a less obvious, but still informative, indicator of progress is the number of private equity indexes now being produced.
Most of these have tended to focus on private equity performance. But a new Private Equity Price Index (PEPI) from UK financial services firm BDO Stoy Hayward instead tracks the price/earnings (PE) ratios of deals involving a private equity buyer. The PEPI index is retrospective, taking in private equity deals dating back to 2001. This enables comparison of the prices paid in private equity deals compared with BDO’s existing indexes for private company sales and listed non-financial company sales over the same period.
The most striking aspect of this comparison, as can be seen from the graph below, is that private equity deal P/E ratios have been higher than private and public company equivalents over the last year (an average of ten percent higher compared to the public benchmark).
This is the first period since 2001 that private equity deals have been more expensive than both of the other benchmarks. In the wake of the dotcom fallout at the beginning of 2002, P/E ratios for private equity deals were 20 percent lower than public company comparables.
BDO Stoy Hayward corporate finance partner Jon Breach, who compiles the index, highlights three main reasons why private equity firms can now pay the highest prices: a shortage of high quality assets coupled with record levels of funds raised; aggressive offers put out by debt providers to fund deals; and the use of competitive auction processes.