The values being paid for private equity deals were hit hard in the first three months of 2013 by a dearth of debt to support transactions, according to a prominent accountancy firm.

According to BDO’s latest Private Company Price Index/Private Equity Price Index (PCPI/PEPI), there was a sharp contraction of the values paid for private equity deals of nearly 50 per cent from an index score of 13.1 in Q1 2012 to just 7.3 in Q3 2013, its lowest point since Q3 2009.

The index compares the EV/EBITDA ratios being paid on the sale of private companies to trade (PCPI) and private equity (PEPI) buyers.

At the same time, the number of private equity deals tumbled 25 per cent when compared to the same period in 2012 (72 deals compared to 96) and stood at their lowest level since Q2 2011.

Peter Hemington, M&A partner at BDO says, ‘What we are seeing is that it is easier for large companies to raise finance through the high-yield bond market than it is for smaller businesses or private equity funds to raise bank debt to fund acquisitions.

‘Even fairly modest-sized deals are requiring a number of banks to club together to provide finance, which is a complex and difficult process. Hence deals at the smaller end are proving harder to get done.’

While private equity continues to suffer, trade buyers are prepared to pay higher multiples to fund strategic acquisitions and drive growth. 

The PCPI Index rose by 15 per cent to 9.3 in Q1 2013 from 8.1 in Q1 2012. This was against a backdrop in which deal volumes also fell, but not nearly as sharply as for private equity-backed companies (3 per cent from 442 deals in Q1 2012 compared to 429 during Q1 2013).

Hemington adds, ‘As we have been predicting the public markets have begun to return as an exit option for private equity funds. If the markets remain calm this would facilitate further profitable exits at the bigger end of the scale.’