PCPIQ2. Private Company Price Index

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1 PCPIQ Private Company Price Index

2 2 Confidence returning to private equity After a slow start to 2013 in terms of quarterly deal volumes, there is little evidence of an improvement in Q We reported in the last quarter that deal volumes declined by 7% year-on-year in Q the steepest fall since Q This quarter, however, has seen the decline accelerate: just 471 deals were completed in Q compared to 521 in Q2 2012; a fall of 9.6%. Furthermore, whilst private equity led the decline in Q1 2013, it is trade transactions which are now slumping. Trade deal volumes fell by 13% from 435 in Q to 380 in Q2 2013, whereas the number of private equity deals actually rose from 86 in Q to 91 in Q a 6% increase, and the highest number of private equity deals for the past five quarters. In the previous quarter it was evident that whilst private equity had the funds to make acquisitions, they lacked the courage to pay the high multiples that trade buyers were prepared to pay in order to fund inorganic growth strategies. Are we starting to see that confidence is returning to private equity? It certainly seems to be if the divergence between the BDO Private Company Price Index (PCPI) and the Private Equity Price Index (PEPI) is anything to go by. The PCPI EV/EBITDA ratio slumped to 6.9 in Q from 8.5 in the previous quarter, whilst the PEPI ratio rose from 7.7 to 10.5 between Q1 and Q The PEPI ratio is its highest since Q2 2012, whilst the PCPI ratio has not hit such a low since Q A similar divergence has not been seen since Q3 2010, the year when private equity investment in the UK rose by 61% and total funds raised doubled year-onyear. Indeed, the recovery in private equity investment signalled the return of the economic prospects of the company as a whole. The PEPI ratio of 10.5 is the highest seen for a year and shows a distinct turnaround in confidence to the private equity market. This is further evidenced by a number of developments in the private equity market in the past quarter, particularly in the leisure and tourism industry; for example Pure Gym s acquisition by CCMP Capital Advisors was completed in June. ECI Partners has kept up its interest in the travel sector by purchasing over-55 travel operator Amber Travel, and the Vue Cinema chain has been sold to Canadian firms Omers Private Equity and Alberta Investment Management for 935m. This positive picture is being repeated in other sectors and, with investors such as Jon Moulton announcing he has begun raising as much as 250m to fund new investments through his listed private equity firm, Better Capital, private equity does finally appear to be turning a corner. However, despite the cautious revival in private equity, the whole market does remain repressed. The combined value of UK companies has fallen to their lowest levels since Dealogic began measuring them in Furthermore, whilst takeover activity has been healthy in the US and Europe, recent data from the Office for National Statistics (ONS) shows the total number of domestic and cross border mergers and acquisitions sank by 61% in the first quarter of 2013 when compared to the same quarter in the previous year. Thomson Reuters data also shows the total number of deals in 2013 are down by 43%. This, coupled with the fact that large deals such as Britvic and Severn Trent have fallen through this quarter, hardly points to a sign of an M&A revival. Analysts believe that economic uncertainty is still to blame for the muted picture: whilst the US has already seen Yahoo bid $1.1bn for Tumblr amongst a number of large scale acquisitions, economic worries in the UK and the Eurozone mean domestic investors are holding off until confidence returns. However, some comfort can be taken from the fact that this caution appears to be the reserve of domestic investors: data released last month from the ONS reports that investments made by foreign companies in the first three months of 2013 increased by 68% to 3.2bn. An onus therefore remains on the Government to reassure investors that the economy is returning to growth. And there are indeed signs: the ONS released data this week that retail sales rose by 2.2% yearon-year in June 2013, whilst unemployment fell by 57,000 to 7.8% in the three months to May Such positivity can only help business confidence which, in turn, should lead to businesses seeking to pay more attractive premiums to make the right strategic acquisitions to capitalise on the growing economy.

3 3 PCPI v Private Equity Q Q Private Company Price Index EV/EBITDA Private Equity Price Index EV/EBITDA Q Q Q Q Q Q to Q Volume of Deals Completed Trade acquisitions Private Equity acquisitions Q Q Q Q Q Q Q Q Q Source: Corpfin

4 4 insert image here Peter Hemington Head of M&A commented Confidence seems to be returning to the economy, illustrated by the rise in the number of deals being done and multiples being paid by private equity houses. Some sectors, in particular those that are service based - have seen a significant pick-up in trading recently and this, along with more robust pricing is encouraging vendors to sell. Also, once deals are underway we are seeing that they are much less likely to falter than before. For trade buyers access to finance is a continuing issue and a policy of caution seems to pervade, creating downward pressure on both prices and volumes. However, with the momentum being built by private equity coupled with an improving economic backdrop I expect to see companies shaken from their stupor and for the deal environment to improve across the board.

5 5 MAKING THE MOST OF THE PCPI/PEPI The PCPI has been updated for 2013 to incorporate Enterprise Value to EBITDA multiples as the method of valuation, replacing the previously used Price to Earnings ratio. These changes have been made to incorporate the level of debt in deals and to use a less subjective measure of profitability. Historical data has been incorporated to ensure comparability and to identify trends. The PCPI/PEPI tracks the relationship between the Enterprise Value (EV) to Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) multiple (EV/EBITDA) paid by trade and private equity buyers when purchasing UK private companies. The private company EV/EBITDA is calculated from publicly available financial information on deals that complete in the quarter. At present, the Private Company Price Index (PCPI) indicates that, on average, private companies are being sold to trade buyers for 6.9 times historic EBITDA. The PEPI indicates that, on average, private companies are being sold to private equity buyers for 10.5 times historic EBITDA. As private companies are generally owner-managed, reported or disclosed profits tend to be suppressed by various expenses that may be non-recurring under a new owner. This will have been factored into the price the purchaser paid, but may not be reflected in the profits declared to the public. The effect of this is that the EV/EBITDA paid as calculated from the publicly available information may be overstated. The PCPI/PEPI is calculated as the arithmetic mean of EV/EBITDA for deals where sufficient information has been disclosed. Over the last four years, the included deals for the PCPI have had a mean Enterprise Value of 36.2m and a median Enterprise Value of 12.0m. The included deals for the PEPI have a mean Enterprise Value of 97.1m and median Enterprise Value of 35m. The PCPI/PEPI is an average measure and a guide, not an absolute measure of value, as there are many other factors that can have an impact on value. If you would like to know more about how to use the PCPI/PEPI to value your company, please contact your local BDO representative.

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