Public Market Turmoil Impacting Valuations for Searchers?

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February 05, 2022

by a professional from Cornell University in Boulder, CO, USA

For searchers looking at tech, cybersecurity, MSPs, IT services, etc., how are you thinking about the public market sell off in tech/IT services impacting your valuations? Is it reasonable to assume that sell off should put some downward pressure on valuations for small companies too? Curious what people think...

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Reply by a searcher
in New York, NY, USA
I regularly speak with sponsors whose business model entails arbitraging the difference between the public and private valuation levels as they emerge in the market. Generally, the valuations for private companies are set only tangentially by public market comps. We have seen that multiples for private companies have actually not fallen nearly as much. And we shouldn't expect them to as the true comps for small private companies will tend to be other small private companies that have reached a market-clearing level for the full capital stack, and not on a couple of thousand shares.

Having said that, there should be a correlation in this instance because the lower multiples for many of the higher-growth, higher-multiple public companies have been the result of higher interest rates (or expectations of higher interest rates). That relationship is economically straightforward and it also applies (perhaps even more) to private transactions. Higher rates decrease terminal values and lower IRRs through higher debt costs and higher overall opportunity costs. So multiples should be lower generically, particularly for companies that don't generate sufficient cash flows to pay out dividends to bring forward the payback period.
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Reply by a searcher
from Ivey Business School at Western University in Vancouver, BC, Canada
I generally see a 6 month lag between public company valuations and impact on private company valuations, at least that has been my experience in lower middle market healthcare transactions. The long lag filters out any month to month volatility in public market valuations.
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