An article in the Financial Times citing research by Bain and Company suggests that the historically underwritten return of three times the original investment is now the exception and not the standard. Two comments stood out:
- “On average, 35 per cent of deals produced healthy returns between 2002 and 2005 compared to roughly 20 per cent of winning transactions between 2010 and 2013, an analysis by Cambridge Associates and Bain & Company showed.”
- “At the peak of the sector’s performance, over 40 per cent of deals produced more than three times the original investment in 2002. That compares to just 19.2 per cent of transactions producing the same returns a decade later, the data showed.”
The challenge is that multiples have been rising as the amount of capital raised for these transactions has continued to climb. But there will be a limit to how much you can pay for a business (expressed as a multiple of EBITDA), and with multiples having reached all time highs, does the industry really believe there is room for multiple expansion beyond current levels?