The private equity world has been through some rough times in the past few years. Judging by the recent revenue and enterprise value trends, those rough times are now gone.
Revenue Trends
Depending upon the industry, interested investors, and the state of the economy, revenue is a critical component in deal evaluations. Given the importance of revenue, here’s what has happened recently. The following two figures look at revenue change in the 12 months prior to a deal and anticipated revenue change 12 months following a deal.
Actual Revenue 12 Months Prior to a Deal
Interestingly, in the second quarter, deals with companies that have seen their revenue grow by more than 10% during the year in which the acquisition is taking place declined significantly, dropping from almost 60% of all deals to around 30%. In its stead, firms that had seen revenue growth of less than 10% saw a marked increase in the second quarter, increasing from around 20% in the first quarter to about 50%.
The shifts between deals with businesses with more than 10% in revenue growth and firms with less than 10% growth (but greater than zero) accounts for a large portion of the change throughout the past year.
Source: Pitchbook
Anticipated Revenue 12 Months After a Deal
The next chart looks at anticipated revenue for the 12 months following a deal. As is no surprise given the numbers in the previous chart, the two main categories are “Increase more than 10%” and “Increase less than 10%”. Interestingly, as just mentioned, the second quarter of 2014 saw a shift away from high expectations of 10% or more to less than 10% anticipated revenue.
Surely, some of the shifting stems from the strength in the first quarter, while other explanations include the state of the economy in the first quarter compared to the second quarter and the makeup of the industries included in the deals.
Source: Pitchbook
Enterprise Values
The next two graphics look at the recent trends in median enterprise value per earnings before income taxes and depreciation allowance (EBITDA) and enterprise value per EBITDA by multiples.
Median Enterprise Value per EBITDA
As shown, recently there’s been a marked shift in value of large firms (revenue greater than $250 million). The shift is not present for smaller firms, which are staying fairly close to where they’ve been over the past two years. The range for medium size firms ($25 million to $250 million in revenue) has been from a low of about 4.5x to a high of a little less than 8x. The range for small size firms (less than $25 million in revenue) has been from a low of about 3.8x to a high of about 5.5x.
Source: Pitchbook
Enterprise Multiple Breakdown
The next graphic looks at the percentage of enterprise values by multiple (EV/EBITDA). Perhaps unsurprisingly, there do not appear to be any strong trends across time. Enterprises with multiples of less than 0x have ranged from 2% of all deals to a high of 9%. Ranging from 16% to 28% of all deals are the enterprises with multiples of 0x to 2.5x. Following those are enterprises with multiples of 2.5x to 5.0x and 5.0s to 7.5x which have ranged from 7% to 20% and 18% to 32%, respectively, of all deals. Lastly enterprises with multiples greater than 7.5x have ranged from 22% to 42%.
Source: Pitchbook
Overall, recent trends in revenue and enterprise value provide some interesting insight into what investors are thinking about the future of the economy.
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