Valuation Doubts Challenge Private Equity

Private equity giants like Blackstone Inc., Apollo Global Management, and other major players in private capital have committed to pouring hundreds of billions of dollars into Europe over the next ten years. However, despite these ambitious plans, the short-term outlook for leveraged buyouts and private equity deals remains uncertain and challenging.

‍

Recent months offered some optimism for M&A bankers, as a few high-profile corporate transactions were finalized and concerns surrounding U.S. President Donald Trump’s trade policies temporarily eased. Still, many professionals in the private equity world are far from optimistic.

‍

Even though global stock markets have recently reached record highs, which usually sparks enthusiasm among dealmakers, private equity insiders are approaching the environment with caution. According to several capital markets executives — who preferred not to be identified due to the sensitive nature of the subject — rising public market valuations are also inflating private company price expectations. This trend is making it even more difficult for PE firms to negotiate deals or find appealing exit opportunities.

‍

Not only are private equity firms finding it hard to sell portfolio companies at desirable prices, but they’re also hesitant to buy. Few exceptions, like KKR & Co., have been active in acquisitions. Although the overall value of global mergers and acquisitions rose in the second quarter, private equity-related deal activity actually declined. Bloomberg’s preliminary figures show that PE deal spending dropped over 20% compared to the same period last year.

‍

One major obstacle is the increased cost of debt. The higher borrowing expenses make it difficult to justify hefty price tags for acquisition targets. Jeremy Duffy, a partner at law firm White & Case, noted that clients are now closely evaluating whether the entire financing structure for taking a public company private with debt still makes financial sense.

‍

A case in point is Platinum Equity’s decision to halt the sale of its Spanish waste management company, Urbaser SA. After a prolonged effort to find a buyer — including interest from Blackstone and Abu Dhabi’s sovereign fund ADQ — negotiations stalled.

‍

As a result, Platinum chose an alternative route: a €2.3 billion ($2.7 billion) debt deal to refinance existing loans and pay a dividend to shareholders instead of selling the company outright.

‍

This trend reflects a broader pattern in the market, where sellers are holding out for high valuations while buyers remain cautious, wary of repeating mistakes from the previous private equity boom when firms paid top dollar for assets that failed to deliver expected returns.

‍

For example, Brookfield Asset Management abandoned talks to buy Spanish pharmaceutical company Grifols SA last year over valuation concerns, although conversations reportedly resumed a few months ago.

‍

IPO prospects for private equity-backed firms in Europe are also looking grim. German auto parts retailer Autodoc SE, backed by Apollo, delayed its planned public offering just last week. Similarly, medical technology company Brainlab postponed its IPO on Tuesday.

‍

Private equity firms often use the valuations of comparable publicly traded companies to price their own assets. But some market participants say this approach is less effective now, as many believe current equity prices — especially in the U.S. — do not accurately reflect underlying business fundamentals.

‍

In the U.S., much of the post-April stock rally was driven by retail investors in response to easing trade concerns, while European equities benefited from a shift away from American political risks.

‍

Sabrina Fox, a specialist in leveraged finance, explained that current equity market levels are higher than what most potential acquirers or lenders are comfortable with. At the same time, private equity investors are under pressure to deliver returns after several years of lackluster deal activity. That’s prompting more firms to pursue dividend recapitalizations — considered one of the riskiest types of financing — to return capital to limited partners.

‍

Another key development is that private equity firms now have to contribute more of their own equity when closing deals. In the past, these firms typically relied on significant borrowing to fund acquisitions. But with lenders tightening conditions, firms are taking on more direct investment risk.

‍

Still, private equity sellers remain hopeful. With massive funds ready to be deployed — particularly in Europe — many in the industry believe deal activity could pick up, especially if fears about the U.S. economy prove to be overblown.

‍

Investor sentiment could also improve if the backlog of unsold companies starts to clear, leading to stronger returns and easier fundraising conditions. That, in turn, would give PE firms more dry powder to invest.

‍

Blackstone CEO Steve Schwarzman recently shared plans to invest up to $500 billion in Europe over the next decade. Apollo’s president Jim Zelter echoed similar intentions, stating the firm is ready to commit as much as $100 billion in financing in Germany alone to support what he called a European “renaissance.”

‍

Meanwhile, some PE firms are carefully structuring their financing to make eventual sales smoother. For example, Urbaser’s new debt package includes €1 billion of portable debt — financing that can remain intact even if the company is sold. This feature could appeal to future buyers by providing funding certainty and reducing transactional friction.

‍

In short, while long-term investment pledges in Europe remain robust, private equity firms are still navigating a complex landscape marked by high valuations, expensive debt, and cautious buyers.

‍