Webinar Recap: High Valuations Are Changing the Nature of Proprietary Deals
Expert deal pros highlight where valuations are headed in 2018 and how record prices are altering their approach in Murray Devine Valuation Advisor’s PE Valuations Webinar
By Dan DiDomenico, Senior Managing Director, Murray Devine
As private equity entry valuations reach unprecedented heights, it’s not surprising that most sponsors are ratcheting up their efforts to transact outside of a formal auction process. To be sure, this is not unlike any other era, as proprietary investments have traditionally represented the gold standard of sourcing efforts to unearth opportunities that may not otherwise become available. What has changed, however, is that in a market where value is so hard to find, no longer does a proprietary transaction necessarily imply that sponsors are actually paying less than full value.
According to our 2018 Private Equity Valuations Report, the median private equity acquisition multiple soared to 12.9x EBITDA last year. This easily eclipsed the median PE multiple of any other year since 2006, including the two years ahead of the credit crisis, when the median multiple last reached double digits. It also topped the median level for total M&A valuations, which includes both strategic activity and sponsored transactions. As the report highlighted, the soaring valuations are indeed changing the paradigm for the asset class, stimulating a flight to quality as sponsors emphasize value creation over value arbitrage to drive returns (at least for their 2017-vintage investments).
But while sponsors have continued to double down on finding proprietary deal flow, the rationale now has less to do with finding a material discount than in years past. This was a point that Chris Collins, Managing Director at Kelso & Co., addressed as part of a recent webinar hosted by Murray Devine.
The reality, today, is that proprietary deals don’t necessarily mean that you’re ‘stealing’ a company or automatically paying less than a full price for a particular asset. Collins, in the webinar, noted that the vast majority of transactions occurring outside of a formal process probably sell at market-rate prices. “In order to preempt a process,” he described, “you sometimes have to hit an aspirational number that hasn’t yet been tested [through an auction].”
However, in an environment that is as competitive as today’s private equity market, proprietary deal flow remains an important lever for investors. This is particularly the case when valuations remain so rich, as investors require that much more conviction to transact at today’s higher multiples.
It’s not just the high prices that are creating new challenges for sponsors. Michael Ewald, Managing Director at Bain Capital Credit and Global Head of the firm’s Private Credit Group, observed that the timelines – from bid to purchase – are also being compressed. And he added that sellers are emphasizing certainty of close as part of their decision making.
This underscores why proprietary deals remain so important. Even if a full price merely represents the table stakes, successful investments in the middle market more than ever require alignment around the cultural fit and a shared understanding around how sponsors and management will work together to create value. This, of course, can be difficult to ascertain working through an intermediary and when buyers are being forced to sprint to the finish.
Kelso & Company’s Collins noted that this is why his firm continues to prioritize proprietary transactions, citing that nine of his fund’s 11 investments were sourced outside of an auction. For those who play baseball or tennis, it’s not unlike the difference between either playing the ball or letting the ball play you.
The webinar, which was originally broadcast on January 24, also featured Bloomberg Editor Devin Banerjee, who oversees the publication’s North American private equity and M&A coverage. In addition to the discussion around proprietary deal flow, the panel also discussed why valuations were high last year and the likely trajectory for multiples in 2018. A replay can be found here.