Analysing data collected from financial investor proposals to management teams who are being advised by Liberty Corporate Finance, covering the period from 2006 to the end of 2019, we have reviewed some of the key metrics and trends.
The data over this period comprises 230+ different proposals put to management teams from some 100+ different Financial Investors, ranging from lower mid-market primary management to large cap tertiary buy-outs. While the businesses are mainly UK or European based, most are global businesses and they are from all sectors of the economy with financial investors from the UK, US, Europe and the Far East.
In this article we examine the returns that the Investor targets when investing in a business. What are they typically targeting and how they differ across deal size and how and why they have changed over the last 6 years?
Our analysis is based on the implied investor returns on a 4-year exit after achieving the management plan whereas Investors will clearly look at returns across a range of operating performance, exit timeline and exit multiple to assess the risk / reward profile they are comfortable with. The analysis throws up some very interesting talking points particularly when looking at trends over time.
Key Findings – Investor Target Returns
The average target returns over the last 6 years indicate that Investors have targeted an average Multiple of Money (“MoM”) return of 2.6x their initial investment and a target Internal Rate of Return (“IRR”) of 30% on their money.
The larger the deal size the marginally lower are the Investors average target MoM and IRR, with investors deploying funds in smaller deals targeting above average MoM and IRR returns.
The data also shows the huge range of Investor target returns with the outliers reflecting the type of business that Investors are looking to invest in e.g. technology-based businesses have more aggressive projections and the target returns tend therefore to be higher, whereas lower growth sectors with more stable profiles have lower target returns.
The minimum and maximum target returns above reflect specific circumstances / investment types including long term infrastructure investments driving the lower end returns and high growth / high risk transactions driving the higher end. The average values reflect the majority of transactions by number and hence drive the main narrative that Investors are raising funds from a similar pool and hence are targeting similar returns across the spectrum of transaction sizes.
How have these target returns changed over time?
Target investor returns have gradually fallen over the last 6 years with their MoM target falling by nearly a whole turn from an average of 2.9x to 2.1x in 2019, primarily reflecting increased competition for good quality investments.