Ukraine invasion spells tough times for secondaries market

Declining multiples spell trouble for deals done in recent years, when valuations were at historic highs, said ex-Ardian secondaries head Vincent Gombault.

The secondaries market will not be immune to the economic impacts of Russia’s invasion of Ukraine, said Ardian‘s former fund of funds head.

High energy prices, low growth and rising inflation are likely to reverse the trend of growing valuation multiples, which has been central to the recent success of the secondaries market, said Vincent Gombault in a quarterly newsletter.

Secondaries funds that target “high-quality assets at a fair price” and have profited from underlying companies exiting into a rising market will be particularly affected. “This expected decline in valuations will clearly have the strongest effect on the most recent secondary transactions. Underlying private equity valuations over the past three years were, despite the pandemic, the highest in history,” Gombault explained.

While valuations are likely to decline, the average net debt-to-EBITDA multiple for private equity-backed companies stood at 6x at the end of 2021, having been steadily climbing since 2012, according to data from LCD Comps.

This could impact the ability of companies to repay debt and ultimately lead to covenant breaches, Gombault continued. A decrease in the average enterprise value-to-EBITDA ratio from 12x to 10x, assuming the current net debt ratio of 6x, means a 33 percent reduction in the equity value of a business. The average EV-to-EBITDA ratio was 11.35x at the end of 2021.

“With valuations set to fall, and the added impact of secondary transaction debt, managers that rushed to deploy capital over the last 18 months and were unable to syndicate their large deals will watch as these deals drag down the overall performance of their funds over the coming quarters,” Gombault said.

In the fourth quarter, Gombault predicted that secondaries market volumes would get as high as $2 trillion by 2030. The market will bounce back strongly, but “market turbulence will ripple through the industry, slowing fundraisings, exposing poor transactions and testing the capability of investment teams,” for the next 18 months of so, he said.

Secondaries Investor reported in January 2021 that Gombault had departed Ardian after more than 20 years with the firm and its antecedents. Under his watch, Ardian’s fund of funds business grew to $55 billion in AUM, equivalent to just over half the firm’s total assets under management.