Private equity managers are paying more for portfolio companies with purchase multiples nearly 12 times earnings before interest, taxes, depreciation and amortization, fueled by a record amount of leverage, according to an alternative investment report released Friday by McKinsey & Co.
Purchase multiples have been on the rise, increasing every year since 2010, the report showed. For example, U.S. buyout valuation multiples, based on a two-year trailing average EBITDA, rose to 11.9 times EBITDA in 2019, the highest level in 15 years. It is a higher multiple than in 2007, when U.S. buyout managers paid 9.4 times EBITDA.
Leverage also surpassed 2007 percentages, with pro forma leverage for U.S. buyouts increased to 6.6 times EBITDA, up from 6.45 times EBITDA in 2018 — and even higher than 2007's pre-crisis peak of 6.5 times EBITDA. The share of all buyout deals with 5 times leverage or less dropped to 7%.
Meanwhile, private market assets under management is on a tear at $6.5 trillion, up 10% in the year and 170% in the decade ended June 30.
McKinsey's analysis includes buyout, venture capital, growth equity, private debt, real estate, infrastructure and natural resources and other, and excludes secondary market strategies and fund-of-funds. Global buyout strategies amassed the most assets under management with $2.1 billion as of June 30, followed by real estate with $992 million and venture capital with $988 million.
Alternative investment manager dry powder rose to $2.3 trillion as of June 30 from $2.1 trillion as of Dec. 31, 2018. Dry powder has grown at a rate of almost 14% a year since 2014, partially due to the rise of megafunds, those funds with $5 billion or more.
For example, $219 billion was raised by private equity megafunds in 2019, accounting for 39% of the total private equity capital raised last year. By comparison, megafunds raised a combined $72.5 billion in 2014, representing 20% of all private equity funds closed that year.