Buried in the latest issue of Bain & Company’s Global Private Equity Report are a few concerning nuggets for investors.First, buyout firms are paying extraordinarily high prices for their targets, even higher than during the last boom in 2007:Historically, the single best predictor of returns in private equity investing is the entry multiple. That shouldn’t be surprising since, in general, higher initial discount rates tend to produce higher returns across assets. Limited partners should therefore avoid using the performance of the recent past to justify their PE allocations, since future returns will likely be lower.As if that weren’t bad enough, Bain points out that the relatively strong performance of the past few years was itself caused by the same forces likely to depress future returns (our emphasis):For the subset of deals in Bain’s proprietary database invested after the global financial crisis, we compared deal model forecasts for revenue and EBITDA margin expansion with the results that each portfolio company actually achieved over the holding period. Most portfolio companies, we found, had relatively accurate projections of revenue growth. However, most did not attain the projected higher profit margins.This breakdown in execution had not come to light sooner because it was masked by macroeconomic factors, notably multiple expansion.
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Buried in the latest issue of Bain & Company’s