9 In focus: Buyout entry multiples
This is the sixth consecutive year that the multiples are rising. With the gap between buyout multiples and all other transactions in the Nordics closing, it is more difficult to catch low-hanging fruits for private equity.
In 2019 entry multiples in buyout deals – the price paid for a company relative to a financial metric – continued to soar. The median entry multiple leaped from 9.4x in 2018, to 11.0x in 2019. Over six years, this figure has increased by more than 50 percent; back in 2013, it was 7.0x. A high amount of ‘dry powder’ in the market – capital available for investments – and increased competition for good companies.
Tech companies draw up total
The increase is primarily due to deals in the large-cap segment. When we exclude large-cap buyouts, median entry multiples are marginally down from 9.0x in 2018 to 8.7x in 2019. Average multiples are marginally increasing, up by 0.2 to 10.3x, when we exclude large-cap transactions.
In general, ICT companies are priced higher because of high growth expectations. Fund managers are willing to pay a high multiple to get a hold of these tech companies, and international investors are increasingly a part of this competition.
“A trend we see is more instances of entering at a high price level and negotiating afterward, which some would argue is a classic Anglo-Saxon approach. I think we will all lose if that becomes the new normal,” says Bjarne K. Lie of Verdane, a Nordic growth fund that specializes in tech.
The gap with other deals closing
In previous years, the trend of changes in pricing between buyout deals and all deals in the Nordics have been aligned. In 2019, this trend was broken, when multiples in buyout deals rose significantly, whereas entry multiples for all Nordic deals fell. Thus, the gap between the multiples is closing, although the pricing in the Nordic private equity industry still is more favorable than the general market.
Entry multiples (EV/EBITDA) for Nordic buyouts
| Year | Median | Average | Number of transactions |
|---|---|---|---|
| 2014 | 7.4 | 7.8 | 77 |
| 2015 | 8.1 | 8.8 | 72 |
| 2016 | 8.1 | 10.0 | 75 |
| 2017 | 8.8 | 10.7 | 69 |
| 2018 | 9.4 | 10.9 | 62 |