Double-digit exit multiples used to be a fantasy in this market. Now they are the assumption. A Yale School of Management analysis of search fund exits shows how much of the return story rests on them.
- Multiples have climbed for years. Entry and exit multiples ran at roughly 5 to 10 times EBITDA at the start of the sample (around 2005) and 7 to 14 times by the end (around 2021), with exit prices at about double entry prices at any given moment
- It is the main source of value. Across the 59 exits studied, around 80% of enterprise value creation came from multiple expansion, while EBITDA margins typically fell even as revenue grew
- The model’s origins assumed none of this. Early search fund investors expected to sell at the multiple they paid. Nearly doubling it between buying and selling is now the base case
- A warning attached: part of what investors have earned came from buyers paying more, not only from businesses getting better. The authors can only partly explain why, pointing to company growth over time, more capital competing for deals at entry and exit, and more sophisticated sell-side intermediaries. If the trend shifts, current return profiles will be hard to sustain
- The study is honest about its limits: 59 exits, and only the funds that made it that far
Our take: prices drifted upward for a decade and a half, and assumptions quietly drifted with them. Worth reading in full if you invest in this space.