Is the Private Equity Market Overvalued?

December 13, 2017

Most institutional investors generally expect lower future returns at this point of the economic cycle as valuations remain inflated across all asset classes. Nevertheless, investors still seek attractive opportunities which provide potential for stronger relative returns.  We continue to see robust fundraising in the private equity industry as investors are attracted to the current fundamentals as well as the long-term excess returns the industry has generated.

Valuations have continued to increase across the private equity industry, partly as a result of improving fundamentals of small businesses in the U.S., and partly as a result of an increasingly attractive sellers’ market, with strategic and financial buyers anticipated to deploy capital over the next few years. These valuations, now averaging 10.5x EBITDA, still remain well below the public markets. Throughout this growth cycle private valuations have not inflated as significantly as they have in the public markets. As seen in the chart, over the last decade valuations in private equity have ranged between a 20-40% discount to the Russell 2000.  We believe this persistently lower valuation in a relatively expensive market should continue to attract capital from valuation sensitive investors as they rebalance portfolios heading into 2018.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.