As we sit here following the election result, we suspect that there will be some tax changes which will affect us all as private investors says Bernard Dale.
As we sit here following the election result, we suspect that there will be some tax changes which will affect us all as private investors. However, we do not anticipate any significant impact on our portfolio or on deal-doing in general. And we believe that private equity (‘PE’) investment is likely to remain attractive as one of the best performing and most consistent alternative asset classes – as it has demonstrated over the short, medium and long-term.
The direction of travel for our direct PE investment portfolio valuations is mainly on a gentle upward trend, at an average of 1.7x per unit invested, and I expect an uplift as we go into the summer as portfolio trading in general is showing an upward trend.
This good news is after a period of low GDP growth, which has meant weak demand at a time when companies have been absorbing significant energy price increases and inflation-linked supply and wage cost rises.
The general economic environment does not lend itself to dramatic rises and this is unlikely to change with the Labour government, though the announcements of spending plans in areas such as housing, prisons and the NHS, there are some opportunities for growth in the medium term.
Nonetheless, our lead PE portfolio now shows an average of £24.7m revenue and £2.8m EBITDA in the current financial year, up from £14.2m and £1.6m in our year of investment. This EBITDA growth is one component in delivering value creation for clients.
The other key component is delivering the exit at a higher multiple than on entry. We have a good record on this too. Where it can be measured (MBOs and replacement capital deals), our average entry multiple is c5.8x. This is low by PE measures, and it is unlikely that our average will remain that low as multiples are on a long-term rising trend, which flattened in recent years, as interest rates have risen. This is shown by the graph of EBITDA multiples in European company sales of values €15m-500m over the last 20 years.
Source: Epsilon research / Argos Mid-market index Q4 2023 €15m-500m (Europe)
I would add here that, in my view, the above analysis overstate multiples, as data is based on historic, audited accounts, whereas the PE community tends to report on current year underlying EBITDA. Like others in the PE community, CC clients have benefitted from this trend when realising investments, with an average exit multiple of 11.3x delivered by CC on its successful PE exits.
We suspect there will be a mini-glut of PE companies coming to market in late 2024, so it will be interesting to see how multiple trends pan out, but we see a generally stable EBITDA multiple environment. Multiples may rise if interest rates drop significantly and there may be a one-off shock if there are significant changes to CGT which affect seller behaviour.
Our priority remains management of clients’ existing investments, though we have a good WIP pipeline and two deals in exclusivity. We currently have a live debt investment opportunity backing a team we have had serial success with previously, with a first charge debt secured on a hotel of some scale. On the PE front we anticipate presenting two MBO’s of attractive growth companies to clients in early autumn.
We are making progress with a number of exits. Two are targeted for completion in 2024 and two in process for H1 2025. We aim to maintain our record of 2.8x investment returns realised across our 12 direct and co-invest private equity exits achieved to date irrespective of any short term anomalies in EBITDA multiples.