Middle-market private equity firms increasingly see market turbulence as an opportunity to secure reasonable valuations in sectors otherwise valued frothily, two financial sponsor investment committee members tell me. Despite a near term pause in public market listings and widespread murmurs of sector wide markdowns, it’s business as usual for the increasingly acquisitive asset class in terms of deal interest. What has changed is their boundless appetites. Firms are still pursuing targets in their typical geographic, Ebitda, and sector strike zones, but are showing less willingness to stretch on valuation.
It’s about time, many firms on the buyside in the past 18 months might say. But it’s important not to overstate the case. One PE source tells me the lower middle-market valuations in his firm’s preferred sectors were never as inflated as those in the upper middle and large cap space to begin with. Slightly larger bids of yesteryear might start to normalize. Still, specialist private equity shops are seeing more responsiveness from founders and families looking to hand over the reins to buyer/operators with expertise to ride out murky economic prospects. Price isn’t the only way to compete.
That’s welcome news for some, but begs the question whether all industries will see the same kind of price rationalization. Recent market choppiness could force private valuations for technology companies in particular to re-rate, but does the recent correction spur similar moves across industries?
For now, the sources say it’s too early for deal tombstone writeups to retire the phrase ‘digital transformation’. 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, said Deloitte Corporate Finance CEO Phil Colaco in an earlier interview.