“In private equity, when you combine an overabundance of cash with more competition, the shakeout is higher price tags and fewer investment targets, which is what we’re currently watching unfold in the industry,” said Nico Cordeiro, PE analyst at PitchBook. “This buildup of capital and aging inventory could launch a boom in exit activity in 2018, especially for PE-to-PE transactions, as PE firms look for liquidity.”
PE Dealmaking Mired by Larger Funds and Dry Powder
Despite the plethora of available capital, PE deal activity declined slightly in 4Q 2017 with 999 completed deals, down from 1,003 in 3Q. On an annual basis, both deal value and volume were relatively unchanged. Counterintuitively, the excess availability of capital was partially to blame for the deceleration in dealmaking. Record levels of dry powder coupled with increased competition created a high-priced environment with fewer quality targets for PE investors. For instance, the increasingly competitive environment kept acquisition multiples elevated, with a median EV/EBITDA multiple of 10.5x, unchanged from 2016. Even with large reserves of capital, the high-valuations led dealmakers to use greater leverage in 2017 with the median debt percentage climbing from 50% in 2016 to 55% in 2017, and the median debt/EBITDA multiple climbing from 5.2x to 5.8x during the same period. This is the highest debt/EBITDA multiple recorded in PitchBook’s dataset.
Lack of Strategic Acquisitions Gives Way to Secondary Buyouts
For the first time since 2010, exit value and volume fell below both 5-year averages in 2017, with a total of $184.8 billion in value realized over 1,097 exits. The technology sector remained a stronghold for the PE exit market, having been the only sector to experience an increase in exit flow (2% boost in the number of exits). The overall downward trend in the exit market can be traced back to the pull-back from strategic acquirers, a trend seen throughout the entirety of 2017. Despite a handful of corporate mega acquisitions, strategic acquirers drove $153.6 billion in exit value across 507 transactions in 2017, which is the lowest amount of strategic activity since 2011. With little participation by strategics, secondary buyouts (SBO) made up almost half of total exit value ($84 billion) and drove the median exit price to $400 million for SBOs, and the median exit price for all exits to an all-time high of $221.5 million. As the saturation of PE-sponsorship grows in the US, PE-to-PE transactions will likely become the new norm, especially as firms look for liquidity for aging inventory. At the end of 2017, 34% of PE-sponsored companies were acquired more than five years ago compared to a 10-year average of 29%.
Fundraising Shows No Signs of Slowing, Putting LPs in Precarious Situation
The slower pace of dealmaking and exit activity did little to deter PE fundraising. A total of $648.4 billion has been raised from 2015 through 2017, the most raised over any three-year period Pitchbook has tracked. In a shift, PE investors raised fewer, larger funds in response to LPs’ desire to consolidate around more-established GPs for reasons like, negotiating a better fee structure, gaining access to co-investment opportunities, and reducing due diligence costs. In 2017, the proportion of funds under $100 million in committed capital fell to 25%, well below both the 5- and 10-year averages of 33%. While this strategy has its advantages, it has yet to be seen whether it will pay off. As found in previous research, larger vehicles have been less likely to deliver top-quartile returns, like that of sub-$100 million funds. This fund size outperformed all other fund-size buckets by a wide margin, with a median IRR of 32.3%, therefore, LPs that have consolidated are likely to see lower returns.
Additional findings in this report include:
- 2017 dealmaking remains on par with 2016
- Elevated valuations do not deter a rising PE inventory
- Spotlight: Follow-on Funds
- PE firms press their advantage
- Q&A: Merrill Corporation
- Secondary buyouts become a go-to option
- LPs look to consolidate in known prospects
Download the full report here.
PitchBook is a financial data and software company that provides transparency into the capital markets to help professionals discover and execute opportunities with confidence and efficiency. PitchBook collects and analyzes detailed data on the entire venture capital, private equity and M&A landscape—including public and private companies, investors, funds, investments, exits and people. The company’s data and analysis are available through the PitchBook Platform, industry news and in-depth reports. Founded in 2007, PitchBook has offices in Seattle, San Francisco, New York and London and serves more than 14,000 professionals around the world. In 2016, Morningstar acquired PitchBook, which now operates as an independent subsidiary.
Bailey Fox and Nick McDonald