Bain & Company: Multiple expansion masks the fact most PE deals fell short of projections

Bain & Company in its analysis of private equity deals invested in the wake of the financial crisis saw multiple expansion as a driver of value creation, falling short of projected margins. The report, “Integrating Due Diligence to Build Lasting Value, shows that private equity firms are missing the mark on the margin projections because of siloed due diligence processes. Bain & Company’s review of 65 mature buyouts invested since the financial crisis found that 71% of deals fell short by an average of 330 basis points below the deal model forecast. The shortcoming, however, was masked by unanticipated multiple expansion, which handily made up for the shortfall in earnings growth. The buyer’s understanding is limited when separating questions about the company’s strategy, commercial capabilities or cost structure rather than looking at the company holistically. Officials at the private equity consulting firm say that overall the industry’s performance has been impressive. Last year for instance, they say, private equity funds capped the strongest five-year stretch with historic $2.5 trillion disclosed buyout deal value. “The industry experienced an incredible run of growth and value creation over the past decade,” said Miles Cook, a partner with Bain & Company’s private equity practice. “This has been helped by rising valuations in the period, which are unlikely to continue.” He added that private equity firms that want to capitalize on the space going forward need to analyze their due diligence processes and build a 360-degree view of a company’s potential.

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