Getting Leverage as a Private Equity Buyer

Economic cycles always unearth a bit of financial creativity, and no one is more creative than Private Equity professionals.  As we look at the current stage of the economic cycle, we’ve reached a point where uncertainty is getting in the way of activity.  Investors and asset owners continue to explore deals, but given the uncertainty, the bid-ask spreads are WIDE. 

The private equity pro is clearly trying to drive prices lower by leaning into that uncertainty and the asset owners are doing everything they can to get 2021 valuations.  But the gap between them is huge despite the fact that both want to transact. 

In order to bridge this gap, more deals are being made with earnout provisions and seller financing.  In each case, private equity professionals are asking sellers to take on more risk in exchange for slightly better valuation.  In fact, of the 18% of M&A transactions that involved private equity buyers last year, 44% of them had earnout provisions measured on EBITDA growth as compared to 10% in 2021.  This is a staggering change, and points to the fact that buyers truly have the upper hand today as they make offers to buy companies. 

Frankly we’ve seen the same thing in the market place.  Sellers know they have a problem.  Thankfully for us and our investors this means far better terms than we’ve seen in years. 

Source: Pitchbook