Where to in the new year for deal valuations? As corporate M&A tops historical records, the only answer is up. “Sheerly from a valuation perspective, the amount of capital or capacity of buyers is growing faster than the creation of new companies, so almost by definition, the law of supply and demand would say there’s no reason to think valuations won’t go up,” says Deloitte Corporate Finance CEO Phil Colaco.
Pick a sector, nearly any, and the spike in asset prices is apparent. Private equity buyers are coping by shelling out, and by picking sweet spots.
But stellar valuations won’t hold back bidder interest. Buyers continue to focus on growth, compensating for high deal values by lowering estimated return profiles. General partners generating an internal rate of return in the 20s are still outperforming other asset classes, even if pricing places historic returns in the 30s out of reach for now, Colaco reasons.
Where are bidders looking?
“Talent and staffing businesses, those are really ramping up dramatically as people are struggling to find employees,” says Colaco. “A lot of talent businesses are really doing well here, as turnover continues to be high. If you have a business that can find, train, and retain employee talent, those businesses will be very well in demand.”
Business services are not alone in their attractiveness. Tech and healthcare could continue to lead M&A league tables, and there’s no shortage of targets across the board. With a couple of notable exceptions.
“If I were going to highlight the two [sectors] that will continue to struggle, it’s hospitality and oil and gas,” says Colaco.
Energy price volatility and the shift toward fuel alternatives reportedly cloud the outlook for fossil fuels even after this year’s bullish performance in sector equities. Meanwhile, persistent Covid waves leave asset-heavy hoteliers with little revenue to offset fixed costs.