Private equity firms would have you believe that entry valuations do not make or break a deal. Pay too high a price and all sorts of operational levers can be deployed to deliver a good end result and make the cynics eat their words. You can choose to believe in this operational wizardry or not, but in the infrastructure space it is widely recognised that there are fewer levers to pull – which means the entry multiple is unquestionably of fundamental importance.
This is highlighted in Swiss asset manager Partners Group’s Navigator report for the second half of 2010 – and the good news is that entry valuations currently look highly favourable. It uses the example of prices paid for private airports to show how valuations have declined since the bubble period of 2006 to 2008 when, according to the report, “cheap leverage, rosy growth assumptions and intense competiton for assets led to lofty valuations for the sector”.
By contrast, the report asserts that the much more defensive capital structures and growth projections seen in today’s deals leave “room for actual performance to exceed expectations embedded in the transaction prices paid”. For deals completed in 2010, in other words, some nice surprises may be in store. Those struck during the market peak, on the other hand, may provide a few nasty shocks.