Net asset values across all categories of private equity funds fell three to five percent on average in the three months through September. In contrast, many listed comparables for private equity portfolio companies registered double-digit losses over the same period, in line with major market indexes, writes Triago.
In a significant deviation from the average, more aggressive markdowns can be expected for funds with significant listed holdings. The estimate of a modest third quarter decline for private equity values is based on the weightings assigned to listed comparables, versus valuation variables that remain positive, like rising corporate profits and discounted cash flow.
In the first half of the year, net asset values across all categories of private equity funds rose above pre-financial crisis levels for the first time, increasing 6.8 percent in the six months through June and 2.9 percent in the second quarter, outperforming major global listed stock indexes in both periods.
The relatively small estimated markdown for third quarter net asset values, plus an expected drop in purchase price multiples, could aid leveraged buyout volume, if not in the fourth quarter, then in the first half of 2012. But this scenario for a kind of “Goldilocks decline” that helps the fair price expectations of private equity sellers and buyers meet is conditional on improving global economic visibility, although not necessarily on a rapidly growing economy.
The average purchase price multiple for leveraged buyouts rose to a relatively lofty 8.8 times EBITDA in the second quarter, 11 per cent above the ten-year average, from a multiple of 8.5 the previous quarter, according to Standard & Poor’s Leveraged Commentary and Data. Any sustained hike in the purchase price multiple is likely to have been short-circuited over the summer by declining global growth forecasts, sparked by Europe’s sovereign debt crisis, and to a lesser extent, by Standard & Poor’s downgrading of the US’ sovereign debt rating and the threat of rising inflation in China.