The analyst, however, continues to view L Brands as undervalued and sees "ample opportunity for value creation." His sum-of-the-parts analysis suggests a possible multiple arbitrage
benefit, but with potentially "sizeable risk." Even "without aggressive multiples," he calculates a potential sum-of-the-parts range of $26-$36 per share.
Although the secondary acquisitions tend to be smaller in scale and sophistication, the acquiring organizations can benefit from the multiple arbitrage
, Aprill says.
Long gone are the days when private equity firms could create value simply through multiple arbitrage and leverage.
Multiple arbitrage, another commonly used lever for value creation by private equity firms, has also become very challenging to achieve with rising valuation multiples, fueled by intensified competition due to record high levels of dry powder.
Generally speaking, there are three established methods for creating value in a management buyout situation: operational improvements which result in earnings enhancement, financial engineering and multiple arbitrage. It is the first of these routes that tends to be taken by most newlyempowered managers who become owners of the business via an MBO.
Finally, the 'multiple arbitrage' method for creating value, postmanagement buyout, is heavily dependent upon timing and prevailing market conditions, reliant upon buying low and selling high.
This quick-flip investment approach makes sense while investors can obtain profits from "multiple arbitrage" (by selling via IPOs at high valuations), but this not likely sustainable and there will be a point in time when these quick profits end.
In China, you also have the growth, but you still have the benefit of multiple arbitrage.
Earlier this year the firm launched the AQR Diversified Arbitrage fund (ADANX), which uses multiple arbitrage
This period is going to be a bellwether for the private equity community with the key question being can the industry deliver returns when it can no longer rely on growth in GDP and multiple arbitrage
Given the constant press attention on the private equity mega-deals led by the industry giants like Blackstone and KKR, which can involve billions in a single transaction, it's easy to forget that most private equity deals in the UK are far smaller with investor returns driven not by financial engineering and multiple arbitrage
but instead by the oldest of fundamentals: profit growth.