12. Entry multiples: Prices increased as pandemic risk reduces
Entry multiples increased in 2021 to a near all-time high, following a decrease caused by the pandemic in 2020.
Both the number of deals, as we have seen in previous chapters, and the pricing increased in 2021.
"In 2021, entry multiples (see facts) increased for both private equity and all other deals in the Nordics. In the previous year, infection control measures even affected well-performing companies, causing uncertainty and difficulties in valuation processes. Many transactions were postponed, and valuations fell. In 2021, the risk perception changed, even though infection control measures were present,", says Joachim Høegh-Krohn, CEO at Argentum.
In the period 2013-2019, entry multiples increased by more than 50 %, showing that the attractiveness of companies outside public markets increased. In comparison, all Nordic transactions saw an 32 % increase in entry multiples. This indicates increased competition for attractive companies in the private equity market over time, in comparison to e.g., the public markets.
"In the last ten years, we have seen a constant increase in the multiples. Market shocks have led to downturns, but in the long run, prices have continued to grow. As an active owner, we need to be shrewd in developing companies during our ownership, and almost expect a decrease in the prices. Private equity creates value through operational improvements, and I put my faith in our asset class to handle multiple contractions best", says Magnus Tornling, Partner and Head of EQT's Global Industrial Tech Sector Team.
In 2021, the increase in entry multiples was smaller for buyout transactions than other transactions. As a result, the relative pricing of buyout deals became more attractive for potential buyers.
In the beginning of 2022, inflation is high and interest rates are increasing. This might affect prices both in the public and private markets going forward.
"What we know is that interest rates mean a lot for the pricing of companies. At the same time, the growth in real terms is moderate. I believe we will be done with the interest rate increases within three years", says Høegh-Krohn.
"We are also following the deglobalisation trends closely. If China gets more isolated from the West, it will lead to less competition and less trade. That might also affect the pricing of companies", he adds.
Entry multiples (EV/EBITDA) for Nordic buyouts
| Year | Median | Average | Number of transactions |
|---|---|---|---|
| 2016 | 8.1 | 10.0 | 75 |
| 2017 | 8.8 | 10.7 | 69 |
| 2018 | 9.4 | 10.9 | 62 |
| 2019 | 11.0 | 11.3 | 51 |
| 2020 | 9.5 | 12.3 | 58 |
| 2021 | 10.2 | 12.2 | 100 |