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The Ballooning Valuations In Private Equity Deals

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ballooning valuations in private equity deals

The Briefing

  • Private equity (PE) deal valuations by EV/EBITDA are increasingly rich and are hitting higher double-digit figures
  • 2021 is expected to be another home run year for PE, with 20% of buyouts estimated to be priced above 20x EV/EBITDA

The Ballooning Valuations In Private Equity Deals

Private equity is getting increasingly expensive. As a result, the pricing of an average deal today, by the EV/EBITDA metric, is expected to be at a premium relative to the last decade.

The EV/EBIDTA ratio breaks down into two parts:

  • Enterprise Value (EV): Adding debt to market capitalization, while subtracting cash gives us the enterprise value. This gives us the total value of a company.
  • EBITDA: Earnings before interest, tax, depreciation, and amortization or, EBITDA, provides a popular way to look at earnings. By removing these expenses, we obtain a clearer look at operating performance.

Overall, EV/EBITDA shows the relationship between a company’s total value and its earnings, and is often seen as the price-to-earnings ratio’s sophisticated sibling, used to view companies the way acquirers would.

However, the EV component is not necessarily intuitive, so let’s expand a little on it:

Why is Debt Added Back to Enterprise Value?

To acquire a company completely, one must pay out all stakeholders in order to reach the final cost of the acquisition. This includes the stock (equity holders) and the debt holders, subsequently, adding back the market value debt to market cap does just this.

Why is Cash Subtracted from Enterprise Value?

Subtracting cash can also be seen as arriving at net debt. That is, the remaining debt after using the cash and equivalents on a company’s balance sheet to pay it down. In other words, if cash exceeds debt, enterprise value shrinks, and the cost of acquiring the company becomes cheaper. Whereas if debt exceeds cash, the acquirer would have to pay off more debt holders, thus making the acquisition more expensive.

What’s Driving Higher Valuations in Private Equity?

1. The Link Between All Equities

First, the public markets are often used as a starting point to derive valuations for deals. Generally, companies with similar business models and operations should be assigned similar valuation multiples. For instance, Lowes and Home Depot, or alternatively, Pepsi and Coca-Cola. Therefore, a company under consideration in private equity often has peers trading publicly.

Furthermore, the average multiple assigned to businesses in the stock market fluctuates through peaks and troughs. Today, they’re trading at a premium to historic averages, a result of a rallying prices and elevated investor risk appetite. Naturally, these public valuations spills over into the private equity space.

2. A World of Cheap Money

Second, asset markets move based on relativity and opportunity cost. A low interest rate environment pairing with the trillions in money printing is placing debt securities at unattractive levels. Hence, low rates of return on debt is resulting in money moving elsewhere.

For private equity though, debt is considered fuel. And in this industry firms use high levels of leverage to acquire companies. For this reason, low rates and cheap debt are a private equity manager’s dream.

But what’s true for one private equity firm can be true for all. Because access to cheap debt means more money chasing deals, and this heightened level of competition is reflecting in the higher multiples and expensive deals today.

Where does this data come from?

Source: PitchBook
Notes: Data is as of November, 2020

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Can You Calculate Your Daily Carbon Footprint?

Discover how the average person’s carbon footprint impacts the environment and learn how carbon credits can offset your carbon footprint.

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The Briefing

  • A person’s carbon footprint is substantial, with activities such as food consumption creating as much as 4,500 g of CO₂ emissions daily.
  • By purchasing carbon credits from Carbon Streaming Corporation, you can offset your own emissions and fund positive climate action.

Your Everyday Carbon Footprint

While many large businesses and countries have committed to net-zero goals, it is essential to acknowledge that your everyday activities also contribute to global emissions.

In this graphic, sponsored by Carbon Streaming Corporation, we will explore how the choices we make and the products we use have a profound impact on our carbon footprint.

Carbon Emissions by Activity

Here are some of the daily activities and products of the average person and their carbon footprint, according to Clever Carbon.

Household Activities & ProductsCO2 Emissions (g)
💡 Standard Light Bulb (100 watts, four hours)172 g
📱 Mobile Phone Use (195 minutes per day)*189 g
👕 Washing Machine (0.63 kWh)275 g
🔥 Electric Oven (1.56 kWh)675 g
♨️ Tumble Dryer (2.5 kWh)1,000 g
🧻 Toilet Roll (2 ply)1,300 g
🚿 Hot Shower (10 mins)2,000 g
🚙 Daily Commute (one hour, by car)3,360 g
🍽️ Average Daily Food Consumption (three meals of 600 calories)4,500 g
*Phone use based on yearly use of 69kg per the source, Reboxed

Your choice of transportation plays a crucial role in determining your carbon footprint. For instance, a 15 km daily commute to work on public transport generates an average of 1,464 g of CO₂ emissions. Compared to 3,360 g—twice the volume for a journey the same length by car.

By opting for more sustainable modes of transport, such as cycling, walking, or public transportation, you can significantly reduce your carbon footprint.

Addressing Your Carbon Footprint

One way to compensate for your emissions is by purchasing high-quality carbon credits. 

Carbon credits are used to help fund projects that avoid, reduce or remove CO₂ emissions. This includes nature-based solutions such as reforestation and improved forest management, or technology-based solutions such as the production of biochar and carbon capture and storage (CCS).

While carbon credits offer a potential solution for individuals to help reduce global emissions, public awareness remains a significant challenge. A BCG-Patch survey revealed that only 34% of U.S. consumers are familiar with carbon credits, and only 3% have purchased them in the past.

About Carbon Streaming

By financing the creation or expansion of carbon projects, Carbon Streaming Corporation secures the rights to future carbon credits generated by these sustainable projects. You can then purchase these carbon credits to help fund climate solutions around the world and compensate for your own emissions. 

Ready to get involved?

>> Learn more about purchasing carbon credits at Carbon Streaming

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