Allen Wagner October 01, 2013
Private equity deal-making picked up in the third quarter thanks largely to growth in buyouts and add-ons, new PE deals data from PitchBook show.
PE firms closed 445 deals worth $76.4 billion, the preliminary third quarter numbers show. While deal-making saw an uptick from 417 investments in the second quarter, capital invested actually dropped $4.5 billion from $80.9 billion in 2Q 2013. Both the increase in deal-making and drop in capital invested can be attributed to buyouts (including add-ons), which typically make up 70% of all private equity deals in any given quarter. There were 23 more buyouts in the third quarter compared to 2Q 2013, of which 16 were add-ons. But those deals accounted for $5.1 billion less than the 289 buyouts in 2Q.
One interesting trend is the returning growth of add-ons as a percentage of buyouts. After hitting a 53% peak in 1Q 2012, add-ons made up a fluctuating, but smaller, percentage of the buyout pool over the last year. With higher tax rates looming on the horizon, private equity firms in the fourth quarter last year focused mainly on new investments, pushing add-ons acquisitions to the wayside. That quarter, add-ons comprised just 44% of the 547 buyouts executed by PE firms. In 3Q 2013, add-ons were 54% of the 312 buyouts.
“Private equity firms are focused on growing their portfolio companies both organically and acquisitively” said John Gabbert, PitchBook’s CEO and founder. “Given their capital resources and investment time frame, acquisitive growth makes a lot of sense for PE investors. The increase in add-ons has been a decade long trend that shows no signs of changing anytime soon.”
This could be an attempt by private equity firms to build up their portfolio companies with smaller transactions, as well-performing public markets contribute to push private company valuations higher. In addition, growing the bottom line for portfolio companies via acquisitions of smaller operations may end up contributing to a better valuation at exit. As PitchBook’s recent Private Equity Exits Report notes, valuations are high and activity has steadily increased the last few months, with 2013 on track to be a strong year for exits.
Another interesting trend has been the declining value of growth deals. While the number of growth deals has fluctuated between 90 and 130 over the last four years, capital invested in these minority investments has dropped dramatically from $10.5 billion across 92 deals in 3Q 2012 to just $3.2 billion across 100 deals in 3Q 2013.
For PitchBook’s take on 3Q 2013 venture capital deals data, click here.