In Bain & Company’s 2019 edition of its Global Private Equity Report, the company argues that the private equity firms that will outperform are those that are prepared for a market downturn.
With lofty EBITDA multiples being one of the top cited reasons by PE managers for a reluctance to invest, firms are focusing on precisely where they want to deploy capital. They are “dialing in on the sweet spots and sectors where they are most confident.”
Per the analysis in the report, it can pay huge dividends to know precisely where you want to invest. In a recession, you may only have a small window to take advantage of compressed EBITDA multiples:
“Downturns inevitably create opportunities as markets stall and target company performance weakens. Historically, this brings valuations down—but not for long. In the past two downturns, the average LBO purchase price multiple dropped about 20% from its high but then recovered most of that within two years. It pays to be ready to pounce when the downturn arrives, developing a clear understanding of where the most attractive targets are in a given asset class or sector and striking aggressively as the cycle plays out.”
This article is definitely worth the read. Click on the link below for more information.