After years of unbridled optimism, private equity firms are beginning to foresee a drop in deal flow as corporates predict the opposite as the M&A market opens up.
“A number of factors can explain private equity’s reduced confidence in European mid-market M&A over recent months,” says Steve Halbert, head of mid-markets in KPMG’s Corporate Finance practice and UK. “We have seen interest rates rising, an increased threat from infrastructure funds and growing concern about over-leveraging. By contrast, the corporate sector remains upbeat and confident about strategic deal-making showing they are truly back in the M&A space. So bullish is the corporate mood that 58% say they do not regard private equity – which has the edge in leveraging, motivating management and closing deals swiftly – as a threat.”
Pricing, as ever, remains a concern, but the KPMG report does show that PE believes valuations are starting to plateau. Of the private equity respondants, 48% reckon prices will continue to increase, compared with 57% of corporates.
Halbert says: “There is agreement that valuations may now be close to levelling out. Indeed, private equity houses are now factoring in lower exit multiples for acquisition targets – a sign the private equity community is concerned about pricing levels. That said, whilst strong appetite for further M&A deal-making remains, the pressure cooker of competitive situations should not be underestimated.”
Such concern over pricing has not translated itself to fear over leverage multiples. Whilst both private equity firms and corporates remain acutely aware of the dangers of over-leveraging deals, neither group appears to believe it will cause major problems, with just 3% of corporates and 4% of private equity houses arguing that it will.
These results tie in with the argument that, whilst defaults are bound to happen, they will be isolated incidents, specific to a handful of companies, not systemic of the market as a whole.