The market for private company transactions remains stable and attractive for those contemplating deals according to research done by BDO Stoy Hayward. On the basis of deals completed in the first three months of this year, price earnings (p/e) ratios of the FT Non-Financials index and the Private Company Price Index (PCPI) were 14.9 and 13.8 respectively, representing an 8 per cent discount for private companies as compared with the price of public companies. The narrowing of the multiples paid for private companies as compared to their public peers is principally due to the increased liquidity in the private companies arena.
This discount has steadily fallen over the last year and is significantly lower than thelong-term trend of 20-40 per cent. The narrowing of the multiples paid for private companies as compared with their public peers is principally due to the increased liquidity in the private company arena. This liquidity is driven by a number of factors including the lower levels of regulation and barriers to entry in the UK comparative to other markets and the increased activity in the private company market, buoyed significantly by private equity house and foreign investment over recent years.
A cautionary note however when applying the PCPI discount in valuations, care must be taken to ensure that the specific circumstances of each case are taken into account. For example, if the growth rates between the historic and projected profits of the private company are greater than the profit growth rates of its comparable listed companies, then an additional premium may need to be applied, reducing the discount. Overall, the ongoing confidence in the UK mid-market and the narrow discount rate is good news for private companies seeking an exit.
Jon Breach, Editor, PCPI
BDO Stoy Hayward
How does the PCPI work
The PCPI tracks the relationship between the current four month rolling average FTSE Non-Financials price earnings ratio (p/e) and the p/es currently being paid on the sale of private companies. The FTSE Non-Financials p/e is calculated from the p/es published in the FT. The private company p/e is calculated from publicly available financial information on deals that complete in the quarter. At the moment, the PCPI indicates that, on average, private companies are being sold for 14.5 times their historic after tax profits.
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