Our clients in the PE industry are a cheery bunch. No matter how much analysts fret about deal multiples or the tepid exit market, buyers and sellers seem to find reason for optimism. Exhibit A comes from our latest Global PE Deal Multiples Report, which included survey data from PE investors. Asked if current deal multiples are within range to achieve “typical PE fund returns,” 52% of respondents marked one of the “yes” options, including 8% who said “yes, very much so.” The other 44% chose the slightly more modest “yes.” We’ve stopped being so surprised about this one—the same question asked earlier in 2017 came back with 68% somewhere in the “yes” column—but we still scratch our heads a bit.
On the heels of the PE Deal Multiples Report was our annual PE Crystal Ball Report, which gauged investor sentiment heading into 2018. Among other standout responses, 77% of those surveyed felt no pressure from LPs to exit investments early. For investors who have held portfolio companies longer than expected, the number one reason for doing so was due to “assets continuing to appreciate and/or perform well.” That meshes with the sentiment reflected in the PE Deal Multiples Report: Over the past three quarters, at least 60% of respondents anticipated revenue improvements of more than 10% for their companies in the first 12 months under ownership.
Taken together, to some degree, those rosy responses help explain the industry’s general mood—much of PE’s current inventory is performing well, and has likely been generating big dividends for its PE sponsors in a record low-rate environment. Meanwhile, LPs aren’t lacking in cash, with record PE distributions being recycled back to them. Taken at face value, it’s a little easier to see the glass as half full.
Still, it’s worth wondering if the flood of LP distributions is masking underlying strains in the market. The customer seems happy at the moment, but that’s only part of the equation. Entry prices are high and show no signs of slowing, and the IPO and M&A markets are always one macro development away from closing. It will be interesting to see what happens to all this optimism if LPs find a reason to change their tune about the asset class.
This column originally appeared in The Lead Left.
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