Smith says that although multiples have been justified by economic growth, global profitability may be nearing its peak, a fact which is being overlooked by markets in their fundamental stock analysis as they look for the next viable candidate for a takeover approach.
Smith also says that private equity is at the hub of this trend. A problem which is being exacerbated by lenders who are willing to offer ‘covenant-lite’ loans to firms who may not have the most extensive track record of credit.
He says: “Credit seems to be very cheap to the private equity firms. The tail is wagging the dog. One of the more concerning aspects now is that it is not just the poorly-run firms which are being taken over – it is also the good firms with little scope for restructuring. You wonder where the private equity firms are going to squeeze the extra profits from.”