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Valuation uncertainty slows PE dealmaking

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Illustration: Tiffany Herring/Axios

Uncertain valuation outlooks continue to hamper private equity dealmaking, delaying some launches into 2025, dealmakers tell Axios.

The big picture: Forward earnings are less visible than in prior years and buyers aren't willing to bet on lofty projections.

Zoom in: Both sides of the deal table are hyper-focused on trailing earnings and cash flow, with forward-looking projections and EBITDA adjustments largely a metric of the past, one middle market PE investor says.

  • "Sponsors are starting discussions earlier with bankers, pointing to a late 2024 or early 2025 transaction," he adds. "To us, that means forward earnings are less visible than in prior years."

What they're saying: "The market is highly bifurcated — particularly in health care — and the best assets are changing hands at reasonable prices, albeit at slightly lower multiples," says Greg Moerschel, managing partner at BPOC.

  • That said, sellers are "hanging on so that they can see earnings grow into a valuation they had hoped to get previously," he notes.
  • "The valuation gap isn't as wide but there is still a gap," says Oak HC/FT managing partner Andrew Adams.
  • To override that gap, "GPs need to raise more capital and, as part of that, get capital back to LPs," Adams says.

Between the lines: Persistently high interest rates stymied dealmaking last year, and dealmakers were hoping for a cut at the beginning of the year, says THL managing director Josh Nelson.

Reality check: "The current rate environment is more 'normal' than many wish to acknowledge," says the middle market investor.

  • "Just six weeks ago, people were talking about five and six rate cuts this year. If there's a single rate cut this year, I'd be surprised," he adds.
  • Now, "lower exit multiples dwarf the effects of higher interest rates on investment outcomes" — so expect longer hold periods, Moerschel says.

Yes, but: "People are trying to anticipate and project what values are. And even if people aren't specifically inputting interest rates into their valuation framework, it's implicit in the marketplace," says Nelson.

State of play: A handful of sponsor-backed health care services companies are currently in market or coming to auction.

The bottom line: "The litmus test, however, will be how many of these current processes end up in a successful sale," says Court Square Capital partner David Nguyen.

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