Why Are Valuations Still Rising & Investors Paying, On Average, 11.2 x Earnings?

It’s been a torrid 2016. Apart from the problems in Europe, and worries about disruption as a result of Britain’s imminent departure from the EU, there’s the threat of the Fed raising rates, the uncertainty of the coming Trump presidency, a lack lustre earnings season …

Why then are valuations still rising, with Q3 valuations reaching a high of 11.2 x EBITDA, far exceeding figures from recent years?

The excellent Pitchbook’s analysis of Q3 activity (free download, but registration required) looks at the possibly reasons.

So far this year, 15% of private equity deals have been in the health care sector and 17% in technology. These percentages are the highest recorded for these sectors and demonstrates a trend of private equity money flowing into these two industries, industries currently perceived as high growth. However, multiples in these industries do run higher than multiples elsewhere.

Given the increased percentage of M&A activity in these sectors, they argue, is skewing the figures to show an average valuation of 11.2 x EBITDA.

Through the third quarter of 2016, nothing has changed in terms of  the trend around total PE deal volume.  Activity has consistently legged lower quarter over quarter, yet if we look at aggregate transaction value, the numbers can be a bit deceiving. Three quarters through the year, total capital invested came in at $484 billion across 2,477 completed deals, which puts 2016 deal value on pace to come in relatively flat with 2015 and volume set to come in down nearly 18% YoY. On a quarterly basis, the macro market landscape looks even more perplexing.  Get the report