A report from BDO Corporate Finance has underlined a striking difference between public and private market merger and acquisition activity so far in 2014.
Whereas activity in public market has burgeoned, already topping activity for entire years in the recent past by some measures: in private markets there has been a contraction of activIty. BDO’s research shows that the number of trade deals in private markets has fallen by 24% in the first quarter of 2014 compared to 2103, from 466 to 355. Private equity deal flow in private markets has also fallen, although less sharply.
Not only has deal flow fallen, but there has also been a difference in the trend of valuations. Whereas EV/EBITDA multiples have gently increased in public markets in 2014, they have fallen in private markets, albeit after a sharp rise in the second half of 2013. BDO’s Private Company Price Index (PCPI) shows that the premium valuations seen in many private deals in the second half of last year have eroded, and average valuations this year have been almost identical to those in the FT-SE All Share Index at 10.2x.
“It’s most odd, really”, BDO partner Tim Clarke told Acquisitions Daily, referring to the slowing of private deals. Clarke points out that one possible reason is that many funds are finding it difficult to generate returns, with momentum having been lost from commodity prices, and weakness in the Chinese stock market feeding through to many other emerging markets at a time when bond yields are continuing to normalise.
With the UK leading economic recovery, and the outlook for profits looking more secure, the flow of initial public offerings (IPOs) been has been one of the few reliable ways for UK fund managers to generate returns. Clarke says that fund managers seem to have been “jumping on” these IPOs, and the appetite has remained even where valuations are not as attractive as they often were when the IPO surge started.
Clarke notes that a few IPOs have started to underperform and also that a growing number are being priced towards the bottom of their initially indicated price range, but does not think that this suggests an immediate drying up of deal flow. Pointing out that IPO activity is highly seasonal, he says that many companies are desperate to take advantage of the appetite while the window remains opens before the summer holiday season. Whether such an appetite remains in the autumn when investors return to their desks remains to be seen, and it is possible that more private companies may look at trade sale if its seems that fund managers show less enthusiasm for IPOs.
But BDO also points out that one area which has strikingly bucked the trend is technology, especially software and services, where EV/EBITDA multiples in private company deals have shown a marked uptick. Clarke suggests that this is unlikely to be a brief blip. He points out that technology is increasingly “at the heart of everything” for both consumers and businesses and the importance of cyber security is growing commensurately. Investment in platforms, applications and security continues to grow rapidly, and the quality and level of innovation of the IT industry in the UK in many areas still stands out in comparison with the rest of Europe. Deal flow seems likely to continue to be brisk as long as capital markets remain healthy.