Valuations rebound to near pre-crisis levels, putting pressure on sponsors

Brooks Zug, senior managing director and co-founder of funds-of-funds manager HarbourVest Partners, this spring told an audience of deal-makers about a buyout opportunity some of his associates had recently pitched with a price tag of 23.5x of trailing EBITDA

Factoring in expected cost-savings, the deal pro forma would be priced at a more reasonable 13x EBITDA. Still, Zug called valuation inflation the biggest change in the buyout market he’s witnessed over the last five to 10 years. Very few of the direct buyout deals the firm considered last year, outside of a few located in Brazil, Russia and other “remote places,” had price tags under 10x EBITDA, he said.

“It’s unlikely we should expect the kind of returns we saw a decade ago,” Zug said at the March Buyouts East conference held in Boston. “We’ll be lucky if the top-quartile funds have a 15 percent (net) IRR.”

The full version of this article appears in the full summer edition of Connections in the Middle Market, published by the partnership of Buyouts Insider and global law firm Duane Morris. Download the edition here.

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