Over the last few decades private equity markets, or leveraged buyouts as they were known before being rebranded, have gained a substantial share of global capital markets. Private markets can be a powerful force for good when they serve as a check to complacent management teams, make meaningful operational changes to a company, allocate capital to its highest and best use, provide a much-appreciated extension of time horizon beyond quarterly earnings releases, etc. However, in more recent times, evidence points to private markets becoming riskier for investors based on the basic investment principles of valuation and financial leverage. Citing a study from Bain & Company, The Economist highlights that purchase-price multiples for private market buyouts have reached all-time highs, with about 2/3 of buyouts happening above 11x Enterprise-Value-to-EBITDA. Additionally, buyouts are increasingly employing greater and greater leverage with more than half of deals employing more than 7x Net-Debt-to-EBITDA. Investors should tread cautiously in private markets as the combination of high valuations, high leverage, and rapidly rising interest rates could result in quite different results than what has been experienced in the last few decades.
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