BUSINESS WIRE)–Business valuations – the primary means by which businesses are evaluated in the investment process – have been significantly increasing according to new results from the 2018 Private Capital Markets Project from Pepperdine Graziadio Business School.
Survey respondents from investment banks report that average company valuation multiples have increased from 8.0 to 8.7 times recast Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) for firms with EBITDA between $25-50 million. The increases are similar for other deal sizes, which are also on the rise after a slight softening in 2016-17.
Thirty-six percent of investment bankers cited the valuation gap as the top reason for private business transactions not closing. Of those deals that failed to close, due to a gap in pricing, approximately seventy percent had a valuation gap between 11 percent and 30 percent. Twenty percent named unreasonable seller/buyer demand as a top reason that deals failed to close.
Approximately 24 percent of angel investors, often considered “high risk, high reward” early investors, said they based their valuations of privately-held businesses on “gut feel.” The report also found that angel investors had the highest cost of capital across all investment sectors, with a median required rate of return of 43 percent, which is down from 60 percent last year.
“Last year, it looked like valuations were starting to soften a bit, after years of very high levels,” said Craig R. Everett, Ph.D., finance professor at Pepperdine Graziadio Business School and director of the Pepperdine Private Capital Markets Project. “However our current survey results reveal that valuations have been aggressively increasing again. Tax cuts and general business optimism are the likely reasons for this new surge in company valuations. It is definitely still a seller’s market.”
The report also found that fifty-six percent of acquisitions in 2017 were by strategic buyers, who invest synergistically to complement their existing portfolio. “The continued strength in strategic acquisitions is great news for retiring baby-boomer founders looking to sell their company,” said Dr. Everett. “This is because strategic buyers are traditionally willing to pay significantly more than financial buyers.”
Other key findings include:
- 46 percent of private equity respondents said that demand for private equity is up from twelve months ago. Respondents believe labor availability is the most important current and emerging issue facing privately-held businesses.
- Limited partners – those who can invest, but not actively participate in management decisions – reported that direct real estate funds are the best risk/return trade-off investment class, with direct investments in second place. Limited partners plan to allocate 27 percent of their assets to direct investments, 19 percent to buyout private equity and 16 percent to real estate funds.
- Venture capital respondents believe access to capital and labor availability are the most important issue facing privately-held businesses today. 39 percent of venture capital providers are targeting healthcare & biotech investments and another 32 percent are planning to invest in information technology.
- Business owners responded that nearly three quarters of businesses (75 percent) are planning to hire additional workers. Approximately 35 percent of respondents believe government regulations and taxes are the number one issue small businesses face today, another 29 percent believe access to capital is the most important issue, followed by healthcare costs (24 percent). Of those policies most likely to lead to job creation in 2018, increased access to capital emerged as number one (25 percent) followed by tax incentives (23 percent), and regulatory reform (21 percent). The study showed that of those that do plan to hire, sales and marketing skills (36 percent) and skilled labor (30 percent) are in greatest demand followed by service/customer service (27 percent).
- 82 percent of companies planning to hire indicate they’d need to train those they hire. 52 percent of respondents believe that general business conditions improved in the last twelve months compared to 36 percent surveyed a year ago.
The Pepperdine Private Capital Markets report survey investigates, for each private capital market segment, the important benchmarks that must be met in order to qualify for capital, how much capital is typically accessible, what the required returns are for extending capital in today’s economic environment, and outlooks on demand for various capital types, interest rates, and the economy in general.