The growth of our partner-backed investment fund is founded on our principle of servicing a mid cap market; i.e. businesses that are well out of the sexy (and risky) start-up phase but do not yet find themselves suffering the complexities of corporate M&A – serviced separately by our Corporate Finance team. In this mid cap space we are now seeing unusually high prices paid for assets that traditionally attracted much lower valuations.
For instance we recently saw one quite unremarkable and traditional business which was sold for 12x EBITDA where historically six to eight times would have been deemed reasonable.
We could draw some upside out of this scenario – there is a much broader interest in conventional businesses that are arguably at the heart of the UK economy. The modest downside is there is a surplus of money chasing deals and it is creating a froth. The bigger downside is that it continues past the point of affordability and risk and reward calculations become out of sync, creating a bubble.
To add to this insight, we were recently with an investment house that manages a PE fund worth some $8bn, and they haven’t done a deal in two years because they cannot justify valuations. So, if the seasoned investors are not doing deals, it seems likely that there is some unsophisticated prospecting going on.
How long will it last?
We know the month of May saw inflation rates up to 2.9% from 0.5% only 1 year ago. If that continues and interest rates follow, we may see a refocus on more traditional savings accounts for cash currently searching for more unconventional homes. Nobody can predict the economic future given all the uncertainties around in global and national politics and significant social change. We do think there is some froth, perhaps not quite a bubble, but ReSolve are comfortable calling it for what it is. We know our space and we expect it to get back to normal within the year – or as long as it takes to hold the next UK election, or referendum, or in fact any sort of national vote.
And our mid cap fund is still open for business. At the right price of course.