Disconnect between public and private market valuations

Tony McDonald

A disconnect between public and private market valuations has developed in the last year, reflecting the inefficiency of the private market, according to Tony McDonald, the managing director of Snowball Group.

Research carried out by Snowball found there had been a significant fall in public market valuations across the board since last year. Listed distribution businesses were trading on average at 22.6 times their price to earnings (P/E) ratio in 2007, and are currently trading at 10.2 times their P/E ratio, while listed asset management businesses were trading at more than 20 times their P/E ratio, and are currently trading at 13.1 times their P/E ratio.

Integrated wealth management companies, such as AXA and Tower Australia, were trading at 18.6 times their P/E ratio a year ago, and are currently trading at 12.6 times their P/E ratio.

However, in the same time period, private market valuations, while not rising as far as public market valuations, fell by a much smaller amount.

“In our experience, the multiples of recurring revenue that have been paid for private smaller financial planning practices have come back a little, but not a lot,” said McDonald.

“It means one of two things: either the demand for smaller financial planning practices is high, or secondly, that the market is less efficient. And I think there’s a strong argument that the market’s not as efficient.”

McDonald said this inefficiency would result in downward pressure on the valuations of private market financial planning businesses in the future. He noted that there were indications that private market valuations were beginning to fall back into line with the public market.

“It takes a longer time for the private market to be efficient. The public market is reasonably efficient… there will be a faster rebound in valuations in the public market when things turn, and a slower rebound in the private market.”