According to PitchBook’s 2017 Annual US PE Middle Market Report, last year recorded the closest flirtation to that 6x barrier since before the financial crisis, with debt multiples hitting a 5.6x median in the US middle market. The last time the median debt contribution crossed 6x was in 2006, and that figure was paired with a much smaller 3.7x equity contribution. The picture is largely reversed today, with equity contributions ranging between 4.5x and 5.2x over the last three years.
Headline valuations (remaining roughly in the 10x range) appear to be going nowhere, and fatter equity checks are by and large required to win deals and pass regulatory muster in today’s market. That likely means that eventual returns from today’s transactions will take a hit once they exit, at least compared to historical returns. It also means that investors have changed their assumptions at the outset.
Alan Jones, the co-leader of Morgan Stanley Global Private Equity, had this to say at a recent industry conference: “Our presumption is that we’ll be exiting at smaller multiples. If we’re wrong, it means we planned for a future that was worse than what actually happened.” Are other investors—including those in the middle market—presuming the same?
This column originally appeared in The Lead Left.
Read more about EBITDA multiples in our 2017 Annual US PE Middle Market Report.