I appreciate Madeline Shi’s thoughts in PitchBook on rates, valuations, and the challenging private equity (PE) deal environment. Further highlighting these trends have been the downstream impacts to the PE professional services market. 

Over the past 24 months, we have seen PE sponsors significantly accelerate, prioritize, and enact value-creation activities for newly acquired assets. We’ve also seen increased PE sponsor efforts to build or supplement value-creation functions within their funds. While the activity isn’t novel, the magnitude of the shift is large, and it’s rattling service providers. Compounded further by lower deal volumes, professional services firms have been scrambling to adjust. Impacts have run the gamut from layoffs to more significant inorganic activity and capital structure changes. 

Whether the catalysts are rates, valuations, or another lever, the growing log jam will eventually clear. With that shift will come a host of new challenges for the professional services industry, but it will present a great advantage for those who are prepared. 

Buyers of PE assets have become more realistic about companies’ ability to grow and expand margins. They are no longer taking the promise of future earnings improvements at face value, as they might have done in a frothy market, according to Agellus Capital managing partner and co-founder Beau Thomas. Instead, acquirers are basing valuations on actual trailing-12-month EBITDA figures. More specifically, buyers are not accepting various add-backs and pro forma adjustments—revisions to financial forecasts—advertised by sellers, which could include projected growth from new branch openings, customer wins, price increases or synergies from an add-on acquisition.

https://pitchbook.com/news/articles/valuations-not-rates-remain-sticking-point-on-pe-deal-flow?utm_content=commentary&=utm_term&sourceType=NEWSLETTER