Troubling Signals for Private-Equity Exits
Key findings
- In recent years, buyout exits were sold at lower median-valuation multiples than held assets — an inversion from historical norms — despite exhibiting stronger margin growth and lower leverage.
- Exited assets’ solid margin growth and contained leverage cushioned the drag from compressed multiples, helping preserve value.
- Held assets — with deteriorating margins and rising leverage — may be increasingly vulnerable to valuation adjustments, prompting closer attention from LPs.
The buyout exit market is facing more clouds on the horizon than silver linings, set against a backdrop of economic uncertainty, stubborn inflation risks and higher-for-longer interest rates.
Following a few years of low distributions to limited partners (LPs), buyout funds' portfolio companies are coming under mounting pressure. Held assets are grappling with contracting profitability and rising leverage. These conditions not only signal deeper valuation risks for future exits but also raise questions about the underlying sources of value creation amid downward pressure on valuation multiples.
The vanishing act of multiple expansion
In more stable market conditions, multiple expansion — buying companies at a certain EBITDA multiple and selling them at a higher one — is a vital source of value creation to drive returns in the exit market. For over a decade ending in 2021, except in 2009, MSCI private-capital data shows that buyout general partners have typically exited assets at a higher median multiple than those still held in their portfolios, with premiums ranging from 0.1x to 1.1x. That longstanding pattern reversed in recent years, however.
From 2022 through Q3 2024, exited assets were sold at lower median multiples than those of the remaining portfolio by 0.5x to 1.1x. This reversal has raised questions about the resilience of the held assets' valuations, especially in the face of ongoing macro headwinds. Recent years have also brought a significantly wider spread in multiples, underscoring the heightened uncertainty in the market.
Exit multiples: Caught between compression and widening spread
Data as of Q3 2024. Ribbons represent the upper and lower bounds of the interquartile range. Shaded area highlights the years when exited assets' median EBITDA multiple was higher than that of held assets. EBITDA multiple = total enterprise value/EBITDA. Source: MSCI Private Capital Universe
Value under pressure, margins in focus
Over the past decade, exited assets have consistently exhibited stronger median since-entry EBITDA margin growth than held assets — reflecting a tendency for higher-performing assets to be prioritized for exit. This selection trend proved especially relevant between 2022 and Q3 2024, as exited assets' robust margin growth cushioned the impact of falling valuations. During this time, exited assets' median margin expansion ranged from 0.2 to 1.5 percentage points. In contrast, held assets — carried at higher median multiples — suffered median margin deterioration of 1.2 to 1.4 percentage points.
This disparity appears to signal a worrisome trend. If top performers exited at compressed multiples, the leftover assets — with narrowing margins, yet higher multiples — could face the risk of steeper valuation adjustments amid macro volatility, possibly forcing painful exits or extended holding periods.
Margin growth took the exit ramp — what's left behind?
Data as of Q3 2024. Source: MSCI Private Capital Universe
Deleveraged assets lead the exit pack
Leverage is another notable point of divergence between exited and held assets. Except for a spike in 2020, assets sold during the 2014–Q3 2024 period kept leverage in check, with median net debt-to-EBITDA ratios ranging from 3.2x to 3.6x, providing a buffer against the recently elevated cost of capital.
Conversely, held assets carried increasingly heavier debt loads relative to EBITDA, with median ratios climbing from 3.5x in 2014 to 4.3x by Q3 2024. While the leverage gap between exited and held assets remained capped at 0.5x from 2014 to 2019, it widened considerably over the 2022–Q3 2024 period, expanding to nearly 1x — underscoring the increased selectivity around exiting less-leveraged assets.
In a market where lenders are tightening standards and rates remain elevated, highly leveraged companies could face ballooning debt-service expenses. Should the macro backdrop worsen, the risk of debt restructurings may grow, potentially dragging down valuations.
Exits favor the deleveraged
Data as of Q3 2024. Source: MSCI Private Capital Universe
Searching for value in 2025
With multiples under pressure and rising macro uncertainty, strong fundamentals are the last line of defense against deeper erosion in exit proceeds and more strain on LPs. Having already weathered a prolonged distribution crunch, LPs may need to look beyond net asset values, and assess how portfolio companies are navigating the challenging economic environment.
The author would like to thank Keith Crouch for his contribution to this blog post.
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