What are your sources of returns? With transaction multiples so high for quality platform investments, how are your firms generating 20%+ IRR? What does your typical return attribution table look like?
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For LMM PE exits the two drivers of Revenue/EBITDA growth and multiple arb seem to still hold up. Part of the reason is that some of these companies were bought over the past few years when multiples hadn’t run up. While new portfolio companies are seeing some multiple increase on entry there are still pockets of proprietary deals where prospects for multiple arb remain. Agree with you that the risk is that multiple arb will be a smaller part of the value bridge so companies may need to be held longer, lowering IRR.
What are you seeing in terms of higher entry multiple vs the past?
Proprietary deal flow is certainly the best source of appropriately priced businesses. It seems like there are a lot more LMM M&A advisors running competitive auctions where the multiples are 8x+. This certainly was the case leading into COVID and seems to have remained.
That's good to know. I think that longer term trend (smaller advised companies) will put some pressure on the multiple arb part of the value bridge for LMM PE.
FWIW bigger PE deals have started to put a more cov-lite leverage into their companies to compensate for increasing multiples. Not sure whether the same can be done as lenders probably see smaller companies as riskier.
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