What macro factors affect multiples the most?
So multiples at exit obviously have a large impact on PE returns. With the past few years having had stable or expanding multiples, PE returns have also been good. However, one thing I'm curious about is, what factors affect multiples the most (I mean more macro trends as opposed to idiosyncratic risk factors for individual companies)? I've heard that declining interest rates have been a major contributor to multiples expansion, and from a logical perspective, recessions most likely also compress multiples. What are some other important macro factors that affect multiples (especially in the private markets)?
I guess another ancillary question I have is - what is a reasonable EV/EBITDA multiple for a fully mature company with minimal growth (let's say, revenue grows at the same pace as inflation)? Most companies with higher multiples have expectations of very strong growth, but once these companies fully mature, what kind of multiples could they be expected to trade at around (all things else held the same)? Is a range of 10-15 reasonable?
For your 2nd question, there are a lot of ways to think about it: 1) if a company was truly risk free or close to risk free, you would just think about it as a bond and you could do a DCF looking at the relevant interest rates to discount it. In reality, I don't think any company would ever be given the discount rate of a bond 2) Again this is a DCF approach, but if you knew the growth rates perfectly, it's just (last cash flow/(discount rate - terminal growth rate))…discount rate again should be in theory resemble bonds because if you're saying that the company grows by the same rate indefinitely, there is no risk associated with the broader market. 3) Bringing PE into this, this company is a great LBO business because of its predictability. Can just do something simple and look at leverage ratios of other mature businesses that PE companies buy and assume entry and exit multiples are the same. To answer your question, 10-15x doesn't sound crazy.
First question, interest rates are the big one. I'd also say inflation expectations would be a big one, especially for business that can't pass on the costs.
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