- Multiple arbitrage is a buy-and-build strategy that private equity firms use to increase value without needing to make any operational improvements.
- There are many use cases for multiple arbitrage, including growth, industry repositioning, and tuck-in acquisitions.
- Though multiple arbitrage is independent of operational improvements, it does not reduce the need for excellent diligence and integrations.
What Is Multiple Arbitrage in Private Equity?
Multiple arbitrage is based on increasing the valuation of a company purely through profiting from differences in the asset’s price. Value created from multiple arbitrage is independent of making operational improvements or realizing synergies. Private equity firms use this practice to create immediate positive returns. By adding a smaller company to a larger company, its valuation increases, and the business will trade at a higher multiple. Generally, multiple arbitrage takes advantage of price differences between two or more markets.
The primary reason multiple arbitrage is a common practice in private equity is because of the inherent opacity in PE. Buyers and sellers have different means of valuing assets. Valuations can also fluctuate for different types of buyers. Knowledgeable acquirers can assume a particular ROI based on a company’s inherent value to specific buyers. Multiple arbitrage tends to be a less prevalent acquisition strategy during periods of economic downturn due to depressed multiples.
Operating in the lower middle market ($5-50M EBITDA) offers significant potential for high returns from multiple arbitrage. A middle market business with accelerated growth is often a prime target for a wide range of potential buyers that represent a greater multiple of earnings upon completing the acquisition.
How Does Multiple Arbitrage Create Value?
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