Any reflection on dealmaking in 2019 is going to start by noting just how expensive everything was. It was, and remains, a frothy seller’s market that just kept getting frothier — at least for the best companies. According to Pitchbook, the average deal multiple in this market is now 12.9x — up from what I thought was an incredible 11.5x last year. That’s more than twice as much as we paid for companies 30 years ago when I started doing leveraged buyouts.
You don’t need experience or intelligence to know great companies are pricey. You do, however, need a lot of both to continue buying and thriving in today’s marketplace. After all, it’s very hard to succeed in private equity if you’re paying those prices without a clear and well-considered growth plan.
On the whole, it’s caused dealmaking to slow, as private equity deal volume has reached the lowest level in nearly three years. But investors don’t entrust us with funds to simply sit on them; putting money to work carefully and effectively is an imperative. So 2019 was all about continuing to adapt to high prices.
Many of the best investors have done so by relying more heavily on technology. It’s notable that the best companies — especially tech companies — are particularly blessed in this market, while cyclical businesses seem to be getting punished. Valuations of up to 10x revenue and 20x EBITDA are not unusual for stellar, high-growth companies, while cyclical, capital-intensive and slow-growing old economy companies are trading well below average.
All of this is happening against the backdrop of considerable macroeconomic and geopolitical uncertainty — and even signs of slowing growth. It’s enough to keep even the canniest investor up at night. It can be harrowing, but we welcome the challenge.
In fact, the crazy prices of 2019 that show no sign of abating are driven by competitive dynamics — lots of money chasing deals and our pervasively low interest rates. They have forced private equity investors to raise their game. It's also worth noting that no established private equity firm should complain about pricing because they also ought to be working hard to sell their best assets and benefit from the high-multiple environment. It cuts both ways.
At Riverside, these high prices have made us write a prescription for investing with conviction in this competitive and challenging environment.
- We only invest in companies we’ll be happy to own through a recession.
- We only buy companies we’ll be glad we bought, even if multiples decrease by two turns of EBITDA.
- We only do deals where we know we can deliver a distinct edge to the company in which we’re investing.
- We lean even harder on experts within our industry specializations to pick the winners.
- We expand our operating resources and apply them early and often, with greater authority.
- And finally, we favor platform investments that will invite lower-priced add-ons and then we aggressively pursue them.
In a high-multiple environment, investors can’t just pay up and hope things work out. They can’t hide under a rock, either. They have to focus closely on each investment opportunity, determine whether or not they can deliver a clear advantage that will make the company bigger and better, then build a plan and work like hell to deliver on it. Which is what we should be doing in any dealmaking environment.
Stewart Kohl is co-CEO at The Riverside Co., a global private equity firm based in Cleveland that has made more than 600 acquisitions and has in excess of $8 billion in assets under management.
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