Labor availability and inflation are major emerging issues for U.S. businesses2021 Private Capital Markets Project report was conducted and provided by the Pepperdine Graziadio Business School
September 21, 2021 – LOS ANGELES, CA – Startup valuations continued to increase during the last year, despite the tumultuous COVID-19 business environment. The revenue multiple paid by angel investors to invest in early-stage companies is now 3x, up from 2.5x last year, according to new results from the 2021 Private Capital Markets Project from Pepperdine Graziadio Business School.
But investors in startups may have to wait a little longer to see their returns. The median expected time to exit for venture capital growth-stage investments is now 5 years, which is up from 3.5 years in the previous year’s survey.
“It is understandable that time to exit has increased for venture capital investments,” said Craig R. Everett, Ph.D., finance professor at Pepperdine Graziadio Business School and director of the Pepperdine Private Capital Markets Project. “Due to COVID, last year was unique. Startups still started, and VCs still invested, but exits were not quite as predictable. Many founders and investors undoubtedly felt that delaying exit for a little while might be beneficial.”
According to survey respondents, over the next 12 months, private equity professionals are primarily targeting Consumer Goods & Services (25%), Manufacturing (24%) and Business Services (14%). VCs, on the other hand are primarily targeting healthcare and biotech (40%) and information technology (26%).
Mezzanine finance providers report that deals in the range between $5MM and $25MM EBITDA have a median cash interest rate of 10% with a PIK of 1%. The previous year had a 12% cash rate and 1% PIK.
The 2021 Private Capital Markets Project report, the nation’s most comprehensive and simultaneous investigation of the major private capital market segments, is available here. The research for this year’s report was underwritten by the ESOP Association, Employee Ownership Foundation, and Confluence Capital.
Other key findings include:
- The median EBITDA multiple for Private Equity deals is 10x. This is for EBITDA deal sizes $25MM – $50MM. For the $10-25MM range, the EBITDA multiple is 7.5x.
- 33% of private equity professionals are planning to sell their portfolio companies to another private equity group, 32% are planning to sell to a private company, and 17% plan to sell to a public company.
- The median REVENUE multiple for Private Equity deals is 7.5x. This is for EBITDA deal sizes $25MM – $50MM. For the $10-25MM range, the EBITDA multiple is 1.5x.
- Private Equity groups look at a huge number of deals that never close. The median PEG reviews 40 business plans to close just one deal.
- According to Private Equity professionals, the biggest emerging issues facing privately-held businesses are government regulations and taxes (28%), inflation (23%) and labor availability (20%).
- A solid majority of Private Equity professionals said that COVID-19 negatively impacted their deal flow in 2020. 42% said that it had a slight negative impact and 19% said it had a significant negative impact.
- Banks report that the most important metrics for getting a business loan approved are Fixed Charge Coverage (FCC) – with a min of 1.2 – and Senior Debt to Cash Flow, with a max of 3.3.
- According to bank lenders surveyed, the max median senior leverage multiple increased from 2.8x to 3.0x this year (for firms with $10MM EBITDA). This means that this size firms can now borrow up to $30MM.
- Banks report that the main reasons for getting business loans are refinancing (41%) and expansion/acquisition (16%).
- According to banks, nearly all (95%) of business loans under $10MM require a personal guarantee from the borrower. Banks are more flexible about this for larger loans.
- According to banks, the main reasons for declining business loans were quality of earnings (25%) and debt load (16%).
- According to banks, the biggest emerging issues facing privately held businesses are: government regulation & taxes (45%) and #inflation (27%).
- 33% of banks say that their loan activity has ALREADY returned to pre COVID-19 levels.
- Venture Capital investors now have expected returns of 25% for growth stage companies. This is down from 30% in 2020.
- “Gut Feel” is the #valuation method mainly used by 15% of venture capital professionals. The other top methods were DCF (17%) and Guideline Company Transactions (16%).
- Venture Capital investors look at a huge number of deals that never close. Even more than Private Equity does. The median VC reviews 63 business plans to close just one deal.
- What are the exit plans for Venture Capital these days? 35% plan to sell their portfolio companies to a public company, 22% are planning to sell to a private company, 17% are planning to sell to a Private Equity group and 16% are planning to do an IPO.
- According to Venture Capital professionals, the biggest emerging issues facing privately-held businesses are economic uncertainly (55%), inflation (55%) and labor availability (45%).
- 45% of Venture Capital professionals expect deal flow to return to pre covid-19 levels by Q3 2021.
- Borrowers of Asset-Based Lending (ABL) are facing tougher approvals. 45% of loan applications for A/R loans are being declined vs. 32.5% the previous year. 58% of inventory loans are being declined, up from 38%.
- 25% of businesses trying to secure financing via Asset-Based Lending (ABL) are doing so because of worsening financial conditions due to covid-19.
- 44% of Asset-Based Lenders (ABL) expect deal flow to return to pre #covid-19 levels sometime in 2022. 22% say it already has.
- According to Asset-Based Lenders (ABL), the biggest emerging issues facing privately held businesses are: government regulation & taxes (67%) and #inflation (67%).
- The top 3 industries served by Asset-Based Lending (#abl) are manufacturing (38%), real estate (15%) and wholesale & distribution (11%).
- 47% of angel investors expect deal flow to return to pre covid-19 levels sometime in 2022. 13% say it won’t be until 2024 or later.
- Angel investors are expecting to wait a little longer for their investments to pay off. The median angel expects their time to exit to be 5 years, up from 4 in last year’s survey.
- Angel investors are targeting the following industries this year: Information Technology (24%), Healthcare & Biotech (23%), and Basic Materials & Energy (13%).
- LOCATION, LOCATION, LOCATION. 48% of #angel investors want their portfolio companies to be within a 2-hour drive.
- “Gut Feel” is the #valuation method mainly used by 29% of #angel investors. The other top methods were DCF (25%) and the Capitalization of Earnings Method (12%).
- According to angel investors, the biggest emerging issues facing private businesses are inflation (26%), access to capital (23%) and political uncertainty (23%).
- Limited partners in investment funds consider the best risk/return tradeoff to be with direct investments, private equity, and real estate
- Limited partners in investment funds consider the Midwest to be the best region for risk/return tradeoff.
- When surveyed, 39% of limited partners said they had under $50MM invested. A whopping 32% had more than $1B invested in LP funds.
- Limited partners in investment funds consider the industries with the best risk/return tradeoff to be Information Technology and Healthcare/Biotech.
- According to limited partners in investment funds, the biggest emerging issues facing private businesses are inflation (44%), labor availability (24%) and political uncertainty (24%).
- Mezzanine finance providers report that in the past year 62% of sponsored deals were in the range between $5MM and $25MM EBITDA. Previous year was roughly the same (63%).
- Most mezzanine deals (sponsored) still have no warrants attached, same as the previous year.
- Unlike sponsored deals, non-sponsored #Mezzanine deals have warrants attached. For deal sizes between $10MM and $25MM, warrants represent 10% of fully-diluted common, up from 5% the previous year.
- Mezzanine finance providers report that their total expected returns for sponsored deals in the range between $5MM and $25MM EBITDA are 12%, down from 16.5% in the previous year.
- Mezzanine providers look at a median of 30 deals in order to close just one.
- According to #Mezzanine finance providers, the biggest emerging issues facing privately held businesses are: government regulation and taxes (40%) and inflation (30%).
The annual Pepperdine Private Capital Markets survey investigates, for each private capital market segment, the important benchmarks that must be met in order to qualify for capital, how much capital is typically accessible, what the required returns are for extending capital in today’s economic environment, and outlooks on demand for various capital types, interest rates, and the economy in general.
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