"Buy low, sell high." It's one of the oldest platitudes in finance, but one that is especially relevant in today's PE landscape. Multiple expansion between entry and exit prices has long been known to be one of the main drivers of PE returns, particularly during times of economic expansion or growth. Indeed, median buyout multiples have hit 10.0x in 2017, more than four turns higher than the 5.6x recorded in 2009. To achieve multiple expansion, PE firms must begin with the first half of the adage: buy low.
But where are lower multiples and consequently higher returns to be found? We examine three sources: smaller enterprise value, early-cycle investing and emerging markets.
- We observe a premium for larger buyout acquisitions. The smallest buyout targets trade at an EV/EBITDA of 5.6x, compared to the largest at 12.3x.
- Early-cycle vintages are likelier to pay lower multiples and generate higher returns.
- Emerging markets provide an opportunity for investors due to their relative affordability. Eastern European and Latin American buyouts trade at 5.8x and 6.9x, respectively.