Sellers in secondary deals want to maximise the valuation credit for untapped integration synergies. But how can PE firms get comfort around the valuation?
Based on data presented in KPMG’s Private Equity Landscape report, this article explores the gap between the information that sellers offer and the information buyers need in order to substantiate value adjustments.
Indeed, according to KPMG’s Private Equity Landscape report, the volume of secondary deals in the UK rose nearly 50 percent year-over-year in 2024 (total deal volume grew by just 25 percent). Overall deal values for secondaries jumped nearly 90 percent.
However, valuation gaps still present a challenge to both sides. In efforts to address this, we are seeing secondary sellers start to show up to the deal table with their own synergy quantifications. They claim that there is still more value to be gained from integration of the asset itself. They present a few numbers to the deal team, and they hand it to the buyer’s financial due diligence experts in the hope that the entire number will be accepted as a value adjustment.
We recently worked with a PE buyer in exactly this situation. The target had presented some data to suggest around £10 million in synergies could still be achieved through further integration of the asset. Our client asked our Synergy team to take an independent, expert look – could it be more, could it be less? In the end, it was less - much less, meaning that we could only get comfortable with approximately 25% of this – which supported our client to make a much more informed decision about the valuation and future operational execution risk.
In part, the lesson here is for buyers: even when you do not plan to integrate a target into an existing asset, it is still important to consult with synergy experts when doing secondary deals. There are also lessons for sellers: be rigorous and detailed when quantifying synergy value to present to a potential buyer (or lender) to ensure the numbers stack up.
UK mid-market deal volumes by sector
With an increasing number of secondary deals coming to market, expect to see more buyers and sellers focusing on quantifying synergy value. At KPMG, our team of synergy experts work with both buyers and sellers to help assess and unlock value in secondary deals. Based on our experience, here are three tips that could help close the gap from both sides of the table.
With the KPMG Private Equity Landscape report calling for increased deal volume in 2025, we expect to see continued high levels of secondary deals in the market, many of which will have unrealised value for the buyer to unlock. Expect to see the more sophisticated PE buyers and sellers ramp up their focus on synergies and build stronger relationships with specialist external advisors over the coming years.
