How long does the window stay open for high multiples in a vertical?
3-5 years is the typical window for high valuation multiples in a specific vertical.
This window reflects the lifecycle of a roll-up. When PE firms identify an attractive, fragmented vertical (e.g., vertical software niches, specialized healthcare, field services), capital floods the space until market saturation and margin realities compress multiples.
The arbitrage play exists in the early stages of an industry consolidation. This attracts everyone & their mother, which leads to peak valuations (even for small add-ons).
However,
(a) The growth of new entrants eventually tapers.
(b) And then eventually the high entry multiples don't yield the anticipated trajectory for all, which reduces the competition for assets.
(c) The quality of available targets also declines, as most of the premium assets have been picked up, so this also exerts downward pressure on the market multiples and comps.
