Chart of the Week #42: Buyout Multiples vs. Public Proxy

For over two decades (from 1995 to 2015), buyout managers acquired assets at a meaningful discount to their public market proxy (the Russell 2000 Index). However, this discount has compressed over the last decade and, since 2020, we have observed an inversion. Over the last four years, managers, on average, have paid a premium to the Russell 2000 (on an EV / Sales basis), despite record-high multiples for the underlying benchmark. This “inversion” could meaningfully erode the second-largest driver of buyout returns over the last decade – multiple expansion.

Absent access to cheap financing or accelerated growth , we believe this inversion will have a negative impact on returns for recent vintages, and for existing NAV, due to the lower return on assets resulting from higher purchase multiples. Without the tailwind of multiple expansion, there will be greater emphasis on GP’s ability drive operational value-add (through revenue growth and margin expansion). We discuss this and more in our recently published Keystone Q3 2024 Market Update .

Note: It is difficult to make a like-for-like comparison between EV/EBITDA multiples given the different methodologies used to calculate EBITDA (add-backs, adjustments, etc.), and therefore we use EV/Sales. For reference, the average EV/EBITDA purchase multiple for U.S. PE backed assets on a TTM basis is 15.0x vs. the Russell 2000 TTM EV/EBITDA multiple of 16.5x. Source: PitchBook as of September 30, 2024.