So what are the early U.S. private equity trends of 2016?
Well, it's no secret investment is down, but to take a wider look at activity, we've featured nine of the top charts from our 1Q U.S. PE Breakdown to get a preliminary sense of how overall strategies are evolving. The numbers for a few of these datasets are likely to shift over time, so remember that these are just early indicators.
Another thing to note: While it’s easy to take the quarterly trends as a troubling sign of what may be to come, the slump in activity could speak to the traits that have allowed PE to outperform over multiple decades. To clarify, concerns regarding the quality of inventory, valuations and strategic competition seem to be headwinds for the asset class, but the creativity, the sophistication and the prudence in investor strategies is what has empowered PE funds to provide the returns LPs desire.
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1. U.S. add-on % of buyout activity
The buy-and-build strategy will continue to be essential for PE buyers as they look to position portfolio companies for any potential dip in the economic and business cycle.
2. Median debt percentages for U.S. buyouts
Debt usage slides amid macro uncertainty along with a competitive middle-market lending environment that has forced lenders to accept much lower rates of returns, a risk they’ll have to more closely scrutinize in the near future.
3. U.S. PE deals (#) by deal size
Lower-middle-market deals, in many cases, can be done amid less competition and help GPs locate attractive valuations. Yet there is also the potential that such deals will require more time and hands-on work.
4. U.S. PE-backed exit activity
While the quarter-over-quarter decline was rather dramatic, it should be noted that historically the first quarter of the year has been slow for PE sales. Notably no IPOs were completed in 1Q.
5. U.S. PE-backed exits (#) by sector
Selling in healthcare remains considerable.
6. U.S. PE funds (#) to hit target
A staggering 98% of all funds closed in 1Q either hit or exceeded their target (read more about this trend here). For comparison, the highest annual number we've tracked is 88%.
7. Median U.S. PE fund size ($M)
At a median of $248 million, vehicles closed in 1Q were rather large, relative to prior years.
8. U.S. PE funds (#) by size
24% of all vehicles raised in 1Q were sized between $250 million and $500 million, which continues to support the trend we’ve seen of managers coming to market with smaller targets, yet more focused and niche strategies.
9. U.S. PE fund closing times (months)
Due to LP enthusiasm in backing established GPs and also newer fund managers with unique strategies, the high success rate for fundraisers in 1Q doesn’t come as much of a surprise.