Steeper EBITDA valuations have created difficulties for private equity firms seeking distressed opportunities in the industrial sector, according to panelists at the 2014 Wharton Private Equity and Venture Capital conference held last Friday in Philadelphia.
“The values that we see in the industrial space today are well beyond anything we have seen in the last 10 years,” said Jordan Katz, a managing director at The Gores Group. “We used to be able to buy businesses for 5-6x EBITDA, but today we are often seeing 8x-10x EBITDA, and it is tough to get our arms around that.”
“It is hard to see companies performing to perfection and the projections being presented as part of a sales process, and they are priced to perfection.”
Another panelist echoed Katz’s comments, adding that steeper valuations have improved the possibility of another default crisis occurring at some point in the next several years. Despite higher valuations, the health of the underlying companies remains a serious question as interest rates rise, thereby increasing the cost of future refinancings.
“It’s a very stressed market right now … We’re back at 2007,” they said. “Rates rise rapidly, and people can’t refinance because they cant support the debt they’re at.”
The alternative situation is equally unappealing. If interest rates remain at their historic lows, it will only be because monetary policy setters lack confidence in the health of the overall economy.
“If rates stay low, they stay low for a reason. Neither is a good outcome for these businesses,” they said.
The second panelist declined to be quoted by name. Journalists at the Wharton event were not allowed to quote panelists or speakers unless they were granted permission to do so.