Buenos Tiempos para Vender en el “Mid-Market”
Aitor Cayero, CFA
It is fair to say that most aspects of our lives and decisions are affected by the fluctuation between the balances and imbalances of supply and demand, and, of course, the same is applicable to capital markets and M&A activity. Within the latter, however, there are some periods of time, such as the present, when clear-cut imbalances emerge between capital available to fund projects and the number of projects available. These imbalances in the current market are pushing prices upwards, consequently easing the always difficult market timing issue for sellers and making the present an ideal moment for owners of mid market companies (EBITDA between €5M to €15M) to divest or raise capital.
Timing the market is one of most challenging aspects of the investment profession. You never quite know if it’s the right time to sell, and multiple circumstances will always appear (or you will make them appear…) that will keep you from taking that final step.
The same presumption, only heightened, goes for small and mid-sized business owners. Multiple emotional biases related to familiarity, comfort or having inherited the company come into effect that will make you prefer to stick to your company.
However, there are some stretches of time when specific factors align and markets clearly lean towards more buying activity, and the sellers that come to the market really do seem to be at the right place at the right time.
One of such stretches of time seems to be the current market, where the main factors fueling investor’s appetite for return are obviously excess liquidity and low interest rates. Investors looking to obtain excess return have put heavy amounts of liquidity in private equity funds, and, in fact, according to Bain & Company’s 2016 Global Private Equity Report, the amount of “dry powder” in the world-wide market at the end of 2015 has reached a record level of $1.307 billion. And 2016 is probably looking towards a new “dry powder” record, considering the number of global buy-out funds and the value of capital they were on the road looking for were both at record highs at the beginning of 2016 (318 funds looking for $247 billion).
Something similar is occurring in the domestic market, where, according to ASCRI, 2014 and 2015 have been the two best years (out of the last 8) in terms of private equity fund-raising by the private sector (average €1.8 billon raised), well above the average amount raised between 2009 and 2013 (average €0.5 billion raised).
This massive amount of money raised by private equity funds, yet to be invested in most part, is adding additional pressure to a domestic market that periodically welcomes only a limited amount of attractive investment opportunities. The obvious consequence of excess cash to invest and a limited amount of exciting projects are bidding battles that are making prices increase, as can be seen in the expansion of the EBITDA multiples paid in LBO transactions in Europe:
A similar trend of multiple expansion is occurring in the domestic market, where EBITDA multiples for companies in the private equity sweet spot (€5M to €15M EBITDA) are on the rise. In this type of market environment, shareholders of companies in this EBITDA range looking to exit or take their company to the next level may still have their emotional biases looming, but at least they can be at peace in terms of receiving a reasonable price if they come to the market while these conditions last.
Thus, the current market, in which the lack of mid-market projects is interacting with an abundance of capital to be invested by financial investors, offers an excellent opportunity to the owners of mid-sized companies to divest or raise capital at the most favorable prices of the last decade.