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Across the private equity industry, valuations have continued to trend higher over the past few years with U.S. buyout valuation multiples reaching 11.8x EV/EBITDA in 2017. These elevated multiples have been supported by an environment of strong economic growth, favorable private market fundamentals, and significant levels of capital available to finance transactions. While buyout multiples may appear elevated relative to their historical averages, EV/EBITDA multiples are still 30% below the average valuation for U.S. small cap companies in the public market. Throughout this growth cycle private valuations have not risen as significantly as they have in the public markets. This valuation discount has provided value-sensitive investors a relative value trade as they seek to rebalance their portfolios.
Going forward, the significant reduction in U.S. corporate taxes that went into effect in 2018 will most directly benefit small U.S. companies as nearly all of their revenues are generated domestically. Throughout the first five months of 2018 we have seen strong growth from both public and private companies, which has led to an acceleration of earnings and cash flow generated by these companies. With less taxes to pay for every dollar of EBITDA, the growth of earnings has made private multiples even more attractive to institutional investors, and will likely drive even greater interest in private equity allocations.
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.
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