Guys, I am trying to understand how people on the buy side (and especially long only) justify any new positions when multiples are all-time highs.
1) Do you just look at multiples relative to the S&P500 Index and the overall space? or do the absolute multiples scare you?
2) In my space (Tech), we have most growthy stocks (30%+ growers) trading at 10x+ EV / Revenues. The multiples keep getting stretched, and for the last 3-4 years you would have sat out the huge rally in the space if you were sitting on the fence because of valuation.+
Would love to hear your thoughts
There are a lot of forces at work here. Speaking on the PE side of things, you have firms that have reaped the benefits of increased valuations the last several years, which allows them to raise even larger funds and generate more fees/carry. PE professionals get paid to put capital to work, so there's inherent LP pressure to do so and continue to plow money in an already heated (and extremely competitive) market. We are at record dry powder levels today and returns are getting squeezed as a result of higher prices. A partial counter to that is the availability of cheap and flexible leverage, which enables firms to stretch on prices paid. In the context of the "cycle", yes, we're over-heated. Generally speaking most PE firms are underwriting to multiple contraction and a 1-2 year recession for new investments. Can't speak to other buy-side strategies, but generally speaking I think most buy-side professionals are going in eyes wide open that multiples will come down and that dynamic is already factored into their underwriting.
In short, I think most people would agree a recession is on the horizon, but until the music stops GPs still have an obligation to put LP money to work that is coming through the door in droves. Curious to hear what others think though.
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