Buyout Bosses Enjoying $1 Trillion Boom See Prices Go ‘Bananas’

(Bloomberg) --

There’s been one common topic hot on the lips of private equity bosses at this week’s major industry gathering in Berlin: eye-watering valuations.

Speaker after speaker at the SuperReturn conference lined up to warn masked attendees about the unsustainable prices being paid for assets in the current deal boom, while reassuring investors with their next breath that strong returns would stay intact. 

Deal multiples, already a talking point before the pandemic, have gone “bananas,” said Allstate Investments Managing Principal Sarah Farrell. Apollo Global Management Inc. Co-President Scott Kleinman suggested the industry was deluded on valuations when he asked “how is this really feasible that a buyout can happen at 25 times Ebitda?”

“High valuations work if everything in the plan goes just right,” said Adam Spence, head of co-investments at Partners Capital. “In reality, it’s unlikely that everything does.”

Private equity firms have been involved in $1.1 trillion of acquisitions this year, already more than 40% above the previous annual record set in 2007, according to data compiled by Bloomberg. Bidding for assets has been fiercely competitive, fueled by mountains of unspent capital and cheap financing. 

Acquiring companies at high entry multiples means buyout funds will be more dependent on faster growth to generate their envisaged returns. This has led to a focus on areas such as technology and health care, which account for more than half of this year’s spending, the data show.

The much-delayed conference in the German capital drew some of the biggest names in the buyout world, including Carlyle Group Inc. Chief Executive Officer Kewsong Lee, J.C. Flowers Founder J. Christopher Flowers, Vista Equity Partners Chairman Robert F. Smith and Thoma Bravo Managing Partner Orlando Bravo.

While Germany’s Covid-19 restrictions limited numbers at the InterContinental venue to 2,000, side meetings were taking place in nearby restaurants and hotels as U.S. dealmakers grabbed the chance to reconnect with European business partners and investors after pandemic lockdowns.

Supply chain bottlenecks, inflation and labor shortages were also high on the discussion agenda, as was the timing of possible interest-rate hikes -- which would impact the use of leverage by private equity firms and, consequently, the prices they’ll be able to pay. 

General Atlantic Managing Director Gabriel Caillaux told attendees the industry needed to be striking deals with an eye on what could be coming next for the global economy.

“We are all assuming there will be some return to a more normalized environment,” he said. “If you don’t underwrite with those standards you get caught with the tide coming out.”

General Atlantic has never been more active, according to Caillaux. The firm’s technology-focused portfolio was up 80% during “an exceptional period of value creation” since the start of the pandemic, he said. 

While many firms deliberately chose to keep the entertainment low-key, Blackstone Inc. and Ares Management Corp. were among those to host after-parties at Berlin’s glitzy bars. One firm even hired Rock and Roll Hall of Famer Nile Rodgers for an invite-only performance.

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