PE Industry Grapples with High Interest Rates, Declining Exit Activity

According to PitchBook’s Second Quarter 2023 PE Breakdown, the first half of 2023 resembled the latter part of 2022 for the U.S. Private Equity (“PE”) industry.

The sector is grappling with consistently high interest rates, which are making it expensive to borrow and manage floating-rate debt. Although PE funds have performed well as an asset class over the last ten years, their performance over the past year has slipped to an average level. 

Concerns persist about the decline in exit activity, with the number of exits dropping by 22.2% from Q1 2023 and consistently staying below pre-COVID levels. This has resulted in more investments than exits, creating an imbalance. Some significant exits include M&A deals such as Adenza ($10.5 billion) and Apptio ($4.6 billion), as well as public listings like Savers Value Village ($2.9 billion IPO) and Kodiak Gas Services ($1.2 billion IPO).

PE managers are adjusting strategies to maintain deal momentum and prevent slowdowns in the leveraged buyout (“LBO”) process. One notable change is a move towards smaller deal sizes, making transactions easier to manage and finance. Almost four out of every five buyouts are now considered add-on deals.

Prices for PE buyouts are undergoing a significant correction. Multiples of enterprise value (“EV”) to EBITDA showed a relatively consistent range of 11.5x to 12.4x over the four years ending in 2022, but has fallen by 18.5% this year. The median EV to EBITDA multiple stands at 10.5x for the 12 months ending in Q2 2023, down from 12.1x in 2022. A similar trend is observed in EV to revenue multiples, which, after a slight increase to 2.2x in 2022, have decreased by 10%. EV to revenue provides a broader measure of value, encompassing a larger range of companies and therefore being less volatile. It accommodates tech companies with robust revenue growth but limited EBITDA and is also more suitable for financials where EBITDA might not be as relevant. The median EV to revenue multiple for PE buyouts now rests at 2.0x over the trailing 12 months, down from 2.2x at the start of the year. 

Looking ahead to the latter part of 2023, there is anticipation of more uncertainty regarding whether higher interest rates will stick around or if the PE industry will see a more favorable environment for leveraged buyouts. In this ever-changing landscape, PE firms will need to stay flexible and creative to effectively tackle these challenges.

If you’re considering making an acquisition or exit, we highly recommend putting together an experienced diligence team to cover all aspects of the business to limit surprises. Schneider Downs has extensive experience providing services to PE firms, including buy-side and sell-side due diligence, tax structuring, valuation and managed accounting services. For more information on Schneider Downs and the services we can offer to your organization, please visit our website or the Schneider Downs Our Thoughts On blog, or contact us at [email protected].

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