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Investors should keep heart, PE will be back

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The story of the leveraged finance market in 2016 was in many ways the story of the LBO — or perhaps more aptly, the non-story.

Investors cried out for more leveraged buyouts to soak up their wall of liquidity, but little was forthcoming.

Multiples are too high some thought, trade buyers too strong.

The suggestion often espoused now is that sponsors will have to accept lower returns if they want to buy anything worth having, which would not augur particularly well for an already parched pipeline.

This is not so, however.

Higher valuation multiples for PE firms don’t have to mean lower returns.

What they do mean is adaptation , and the PE industry is well underway on that path.

PE firms are already starting to act more like trade buyers — making acquisitions for synergies with existing assets rather than wading into wholly new sectors.

Advent International’s purchase of Morpho was a classic case of this. Advent likely paid toward 15 times for the asset, but its combination with Oberthur Technologies has been widely praised, and the combined entity will be well positioned for developments in the payments sector.

One should also remember that looks can deceive. Comparing sponsor returns now to those of years gone by is a crude measure.

PE firms are also raking in new sources of funding to keep costs down, adding pension funds to the mix. That eases the pressure on having to pay such high multiples for acquisitions.

Furthermore, factor in anaemic inflation levels and real returns are likely to stay punchy.

Investors should approach Christmas with jollity therefore, sponsors will bring gifts soon enough.

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