By Richard Barley
LONDON (Reuters) - While debt markets remain buoyant and funding for leveraged buyouts is freely available, Apax Partners is starting to structure deals with the assumption that acquisition multiples will be lower in two to three years' time.
Adrian Beecroft, chief investment officer at Apax, said on Tuesday that his firm would pay less for businesses now than it would otherwise, based on assumptions about how much the companies might fetch if they were sold on to other private equity buyers in the future.
"There is huge capacity in the debt markets at the moment," Beecroft told the Reuters Hedge Funds and Private Equity Summit in London. "It'll go away to an extent. When you leverage companies up to this level, there are going to be some accidents, even without a general economic decline."
This will have implications for the level of leverage on future deals and the availability of debt, particularly if the exit from a deal is a so-called secondary sale to other private equity firms, rather than an initial public offering, which remains the preferred route.
"You have to take a view on how long the debt is going to be around and at what cost," Beecroft said.
"If you are selling it in secondary (markets), the quantum of debt is very important for a buyer," he said. "We assume in two to three years' time that multiples will be one to 1.5 times lower."
As a result, "we will pay less today, than we would if we were more bullish about multiples in three years' time," Beecroft said.
Average debt to earnings before interest, tax, depreciation and amortization ratios on leveraged buyouts have been rising steadily since 2003 as a combination of cheap debt and a search for yield among investors have driven borrowing levels higher. Continued...
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