Deal Pricing and Returns in Private Equity
Posted: 9 Jan 2016
Date Written: December 10, 2015
EV/EBITDA multiple expansion in Private Equity (PE) transactions strongly influences deal returns. As multiple expansion is the result of deal pricing differences between entry and exit, this paper attempts to shed light on how relative deal pricing influences multiple expansion and deal returns. We analyze the influence of both market price levels and of relative pricing in comparison to those market prices on EV/EBITDA multiple expansion. Further, we analyze the influence of this relative pricing on final deal returns. We use a sample of 2,174 unique PE transactions. We find that multiple expansion is an important factor in explaining deal returns. Further, we find that buying low and selling high in comparison to market prices from the same segment positively influences multiple expansion. While there is a need for both, selling high yields about twice as much as buying low. We attribute a skillset to general partners who are investing in PE deals, as they can influence the pricing when buying or selling companies through their negotiations. As a negotiation is something entered into consciously, the outcome – resulting in deal pricing – is not based purely on good or bad luck. This means that limited partners providing capital to PE funds should look for fund managers with this skillset as it can help achieve higher than normal returns in their transactions and funds.
JEL Classification: G24, G30, G34
Suggested Citation: Suggested Citation