Interest rates and multiple compression in the UK

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by a searcher from Harvard University - Harvard Business School
in London, UK

3yrs ago

Interest rates and multiple compression in the UK

Hi everyone,
I am searcher based in the UK and I have spent the past few weeks looking at a rollup opportunity. I have found a few healthy businesses in the space and I am engaging with sellers.

Here are some factors that I like about the space:
-businesses in the space generally generate 25-35% EBITDA.
-business in the space can be acquired for £1M for £250K EBITDA (≈4x multiple)
-while there is room for growth, these businesses have a cap for organic growth
-from the data collected, the multiple arbitrage kicks in very nicely at approx £1M EBITDA where your multiple goes to ≈8x. This would be the main value creation driver.

However, I am having second thoughts based on this:
-With interest going upredacted%) to fund acquisition, debt becomes much less obvious as a value creation lever and I am not expecting it to go down anytime soon.
-Because of the higher interest rates, I am thinking that might slowdown activity for larger buyers to acquire us after we rolled up a few businesses and that it might compress our multiples.
-On the other end, I hear that small-mid cap PEs have record levels of dry powder which might take years for them to deploy.

Anyone has thoughts on this?

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reply by a searcher 3yrs ago
from Clemson University in Charlotte, NC, USA

High quality businesses are still trading at strong multiples, so if you are able to grow / do add-ons there will likely still be some multiple arbitrage at exit. You can never perfectly predict the path of interest rates / market conditions, so the more important thing I would focus on is the company's ability to service whatever debt you intend to put on it at various scenarios.

reply by a searcher 2yrs ago
in New York, NY, USA

is the revenue at physiotherapy "recurring"? what percent of revenue is from existing customers? i could imagine an 8x multiple if recurring in a more normalized economic environment but wonder if 1m cash is really the inflection point. not to discourage as arbitrage opportunities come (and typically quickly go)