Back to School: Study says U.S. PE multiples fell in 2014

It had to happen eventually. Median EBITDA multiples fell for U.S. buyouts in 2014.

After hitting the double digits – 10x – in 2013, the median EBITDA multiple for U.S. buyouts declined to 8.9x last year, according to a report from data provider PitchBook. The debt component of the median EBITDA multiple also fell from 6.5x to 5.8x.

“Multiples are hard to quantify and should be taken with a grain of salt, especially since different segments of the market will command different multiples,” according to PitchBook’s 2015 Annual U.S. Private Equity Breakdown.

That said, high valuations put downward pressure on deal flow, forcing some private equity sponsors to stay “on the sidelines” through the fourth quarter, according to the report. U.S. private equity firms closed 625 deals worth $109 billion during the quarter, the lowest total since the first quarter of 2013.

Even with an anemic fourth quarter, however, overall deal volume increased by roughly 4 percent year-over-year, according to the report. U.S. buyout firms completed 2,955 deals amounting to $522.6 billion of total value, compared to 2,947 deals worth $501.5 billion in 2013.

The decline in EBITDA multiples may be due to firms placing greater emphasis on mid-market acquisitions, which traditionally offer lower EBITDA multiples, according to PitchBook data. “Even big firms like Carlyle and TPG did more small deals in 2014, and they expect to keep exploring the middle market in the near-medium term,” the report said.

Add-ons have become an increasingly vital part of the buyout universe over the last five years. Those deals accounted for less than half the buyouts completed in 2010, but since then have accounted for a larger percentage of deal flow each year, according to the report. U.S. firms completed 1,275 add-ons in 2014, which represents 60 percent of the total number of buyouts completed.

Fundraising holds steady

Fundraising remained strong in 2014, with 283 funds closing on $189 billion of commitments.

While that represents a decline from 2013, when U.S. firms closed on $220 billion across 287 funds, it is also significantly more than what was raised in every other year since the global financial crisis. (Buyouts previously reported that U.S. firms raised $200 billion as of mid-December.)

“It’s not much of a surprise that the PE firms found it easier to fundraise over the last two years,” the report said. “First off, while mega-funds have come back in a big way in 2013 and 2014, the number of funds to close with less than $100 million has more than doubled since a low of 51 in 2009.”

Almost 110 small funds closed in 2014, thanks largely to how easy it has become to pitch smaller vehicles to limited partners, according to the report.

Average closing times also reflected the easier fundraising environment, with funds spending an average of 13.7 months marketing their vehicles, according to the report.

“The question now is whether this two-year trend will continue,” the report said. “There are both reasons to be optimistic and concerned. PE firms have received positive news from limited partners, some of which have begun or plan to re-evaluate shifting away some of their allocations from hedge funds.” That could free up more capital for private equity.

Still, there is a concern that too much LP money has already made its way into the asset class, leaving GPs “with more commitments than they know what to do with,” the report said.