Real Deals | PE-backed Companies Performing ‘Robustly’ Compared to Public Companies

Jun 2023

Originally posted by Real Deals on June 7, 2023.

According to Lincoln International’s proprietary Valuations & Opinions Group Q1 2023 data, European private companies are performing better than public companies in terms of revenue and EBITDA as they are not greatly affected by public market volatility. EBITDA margins and growth are getting stronger, but revenue growth is slowing.

Traditionally, the public and private markets perform similarly. When COVID-19 lockdowns began, public and private market valuations moved in the same direction. However, when the economy began to stabilize post-lockdowns, the public markets bounced back quickly and the private markets took longer to rebound. This yielded a public market valuation retracement in H2 2022 which hasn’t been seen with the private markets. The retracement has caused private and public market valuations to align, as demonstrated by the Lincoln Private Market Index converging in Q2 2023 with the S&P500 enterprise values.

Richard Olson, Managing Director in Lincoln’s Valuations & Opinions Group, commented, “During the first half of 2023 we’ve seen public markets stabilizing, volatility-wise and earnings-wise, so public markets have remained up. We’re just starting down the road on Q2 valuations for private markets, but what I can say is that the financial performance has remained relatively stable as we’ve seen it move forward. On that basis, I would expect private market valuations to be directionally similar.”

More deals are being funded through the private markets, with the current turbulent macroeconomic environment as evidenced by a decrease in quarterly transactions being a key reason, and Lincoln expects this to continue.

For the deals that are closing, healthy transaction multiples have remained as private equity and credit funds have record-high levels of dry powder.

“So far, the best quality deals are getting done in this environment,” Richard said. “Given the large amount of private capital available to do these deals, there’s a lot of competition over them. So, as a result, the available multiples and the leverage at which these deals are getting done remains quite stable, albeit there is upward pressure on equity cushions.”

In terms of the market overall, companies are struggling to find acquirers and secure financing because of rising interest rates and concerns about a company’s ability to service debt. Lenders are hesitant to deploy capital and covenant breaches have also increased, both negatively impacting borrowers.

Richard commented, “From what we can see this quarter, the outlook for European private companies remains uncertain, although any progression of financial stress through those companies appears likely to be isolated among companies highly exposed to energy, rising base rates and interest margins, and increased labor costs.”

Additional insights can be found in the original article.