Private equity EV/Revenue multiples have increased 70% since 2000.  They averaged 10.3x for the first three quarters of 2018 versus 6.6x in 2000.  As a result of these higher valuation expectations, the traditional private equity playbook of acquire, cost restructuring, and flip based on financial engineering are being disrupted by growth equity PE players like Vista who demonstrated the success of this model through the acquisition and sale of Marketo.  Vista acquired a struggling Marketo in 2016 for $1.75B, improved it, and sold to Adobe a little more than two years later for $4.75B.  To learn more about this deal click thru Billionaire Robert Smith’s Vista Equity Makes $3 Billion Selling Marketo

Pitchbook recently published a free piece of research that dives into the trends and drivers for PE multiple expansion.  The following chart is very illustrative:

Debt/EBITDA multiples have increased 70% from 3.3x to 5.6x, while EV/Equity multiples have increased  45% and overall EV/EBITDA multiples have increased 58%.

Pitchbook cites a number of factors behind the multiple expansion:

  • Abundance of PE dry powder
  • A continuously low interest rate environment
  • Relaxed regulations on leveraged lending
  • Increased competition from strategics due to the plentiful cash on corporate balance sheets
  • PE firms have begun targeting larger portfolio companies, which tend to trade at higher multiples in both public and private markets; median deal size has grown from $28.5 million in 2009 to $100.0 million in 2017
  • PE firms have also developed an appetite for companies in fast-growing industries, such as enterprise software, shedding their reputation as distressed specialists in more mature sectors. These fast-growing companies tend to command higher multiples because their future earnings and cash flows are assumed to be significantly larger than current figures.

Pitchbook also found that add-on transactions tended to have traded at a premium to non add-on deals:

PE EV/EBITDA Eit Multiples

The premiums are justified by the classic economics of add-on deals: synergies from operational consolidation, cost cutting, and revenue expansion through access to a larger assembled customer base and distribution channels.