Multiple Arbitrages is a strategy used by private equity firms to increase the valuation of a company without making operational improvements. It involves acquiring a company at a lower valuation multiple and then selling it at a higher multiple, profiting from the difference in multiples. Here are the key points about multiple arbitrage:

It takes advantage of the fact that larger companies typically trade at higher valuation multiples (e.g. EV/EBITDA) compared to smaller companies in the same industry.

There are three (3) main ways to execute Multiple Arbitrages:

     1. Acquiring smaller companies (tuck-ins/bolt-ons) to increase the size and valuation multiple of the combined entity.

     2. Repositioning the target company into a higher growth/multiple industry without changing operations.

     3. Rolling up a private company into a larger public company at a higher multiple.

It is commonly used in the lower middle market ($5-50M EBITDA) where there is significant potential for higher multiples as companies grow in scale.

Multiple arbitrages create value independent of operational improvements or synergy realization. The value is unlocked purely by the valuation re-rating at exit.

While it can generate attractive returns, multiple arbitrages do not reduce the need for thorough due diligence and successful integration of acquisitions.

Examples include Cortec Group's investment in Yeti Coolers and Syntegra Capital's investment in Moleskine notebooks, where they achieved very high exit multiples driven by the companies' rapid growth during the holding period.

Multiple arbitrages allow private equity firms to generate returns by acquiring companies at lower multiples and exiting at higher multiples, without necessarily improving operations, by taking advantage of valuation discrepancies across different sizes and industries.

June 10, 2024

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