Morgan Stanley’s David Miller talks higher multiples and mid-market activity post-covid

According to Miller, businesses that have benefited in the pandemic tend to be in the healthcare space, e-commerce and software.

Private equity firms are putting more equity into deals as select companies trade hands at multiples slightly higher than pre-covid, Morgan Stanley Investment Management’s David Miller said at a virtual private market panel Thursday.

“Quality assets are the ones that have disproportionately benefited in covid,” said Miller, head of Private Credit & Equity at the firm. “So, finding businesses that have stable cash flow – if you combine that with limited availability of dry powder – people are willing to pay really good prices.”

According to Miller, businesses that have benefited in the pandemic tend to be in the healthcare space, e-commerce and software.

In healthcare, Miller said, bioscience companies as well as digital solutions for pharmaceutical education have become more interesting. Things that used to be done in person now need to be done remote, so solutions supporting that change are becoming more valuable, he explained.

On the other hand, negative trends that were present before the pandemic have also accelerated. For instance, companies in big-box retail were already losing their position in the market before covid, and now they are even less in favor, Miller said.

That said, those lower-performing companies are not being sold by private equity firms at the moment: “Certainly, folks want to sell assets that have performed very well. There is a lot of demand in the market, so sellers are getting good multiples. You’re actually seeing good deals getting done,” Miller said.

“Businesses that are struggling are not being sold by private equity. If the asset is not performing very well there is no point in selling it because nobody is going to get credit for it when covid is over,” he added.

For the well-performing, quality companies, Miller sees deal multiples slightly higher than pre-covid, which puts pressure on investors to have a clear growth strategy.

“You have to have a really good plan if you pay 13x to 14x EBITDA on how to grow the business,” Miller said. “You have to have a plan on how to roll up the sleeves and do the work.”

Looking forward into 2021, Miller sees demand for deals increasing, especially in the mid-market. That’s partly driven by the big dislocation in the market that occurred in the first part of 2020 and the need for rescue capital that some companies still show, he added.

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