Entry/Exit Multiple (low vs. High)
Would you rather enter and exit with a low x or high x? (ie enter 6 exit 6 vs enter 9 exit 9)
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Um...the goal is to enter low and exit high.
That's the goal, but it's hard to justify multiple expansion in five years when you model it out today
Ceteris paribus you'd likely want the lower multiple entry/exit as you technically have more of a margin of safety on the initial investment
I would agree. If you enter at a 6x, there is a stronger likelihood of being able to exit at 6+. If you enter at 9x, that is already on the richer side and the likelihood of being able to exit at 9+ is going to be lower.
In other words, there is more upside for multiple expansion the lower you enter and generally less contraction risk.
Also, all else being equal, you are likely to be able to leverage a lower-multiple investment more aggressively, since debt capacity is often calculated as a multiple of EBITDA.
If you're asking about the actual number of the multiple, and this applies to PE investing as well as investing in publicly traded companies (so you can jump on google finance and look at the p/e ratios for easy to find examples), that's relative to the industry (some industries just don't trade very high, think of a plain Jane retail grocery chain-it's a mature industry with lots of pressure from Walmart, so they just don't trade too high and most likely never will, compared to tech which in general is a growth industry so it's rewarded with higher multiples), the growth prospects of the particular company (so, to follow the example, look at different tech companies: Intel doesn't trade very high because even though it's massively profitable and in tech, it's a mature company in a sub sector of tech that's not growing quickly so it trades around 13-14, whereas investors think Facebook has good growth prospects so it trades north of 70 the last I looked) and the current market conditions (in 2006 nearly everything, public or private, was expensive, by 08-09, everything was cheap).
So while you'd always like to buy at low multiples (if you're taking a company private or just buying stock, at a low p/e, if you're buying private companies some form of ebitda, ev/ebit, etc valuation), you might be an idiot if you bought a stagnant grocery store chain at 10x, but you might be a rockstar if you could buy a good growing tech company at 10x.
In PE investing in general, lower multiples work better because you can apply more leverage and it's why you rarely see high growth/high multiple tech companies either taken private or private tech co's bought by PE firms (although that's not the only reason).
The conundrum of PE is that if you raise a fund, you want to deploy the capital and acquire companies as soon as possible. So when the megafunds raised massive funds in 04-06/07 (and really any sized fund that raised their fund then), they were in their investment period and needed to deploy capital and bought at high multiples based on high rev/profit because the economy was high flying, so a lot of acquisitions were made at the exact wrong time because you and your LP's want that money invested.
There is good discussion on this question in this thread: http://www.wallstreetoasis.com/forums/lbo-model-impact-of-raising-entry…
This is a simple mathematical question. Given the exact same business and D/E, you'd want the lower leverage because in both cases you have same unleavened cash flows
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