In an LBO we typically assume no multiple expansion. However, don’t we see multiples change frequently (or even everyday) within liquid markets? Why is that we don’t see / don’t assume multiple expansion in illiquid markets (or is it just that it is too difficult to forecast?) or am I just thinking about multiple expansion completely wrong
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The exit multiple you use is assumed to represent a long-term stable multiple for the business. The key distinction is that your exit multiple represents the entry multiple for the next buyer: sometimes this is strategic M&A or secondary sale, in which cases it's not so easy to comp against currently public trading multiples. If you choose the route of IPO then obviously for your comp sets, the market caps will fluctuate day by day and so will the current implied TEV/EBITDA multiples that help set IPO pricing. However, even then, you can't predict multiple fluctuations and you're investing with a long-term/illiquid mindset for PE.
I don't think a "long-term stable multiple" exists for any company. In a steady-state or longer horizon, all multiples gradually decline over time as you bake in less growth
Well yes it's clear no multiple will be fixed into perpetuity. What I mean is a normalized multiple that is applicable for a longer-term horizon.
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