Investments to Exits Ratio Down to Decade-Low 2.1x
August 18, 2014
Worldwide, the PE industry acquired an average of only 2.1 companies for every one exit during 1H 2014, one of the lowest ratios on record. Beginning in 2010, the investment-to-exit ratio began to decline dramatically, from 4.1x in 2009 to almost half that in our most recent reading. With investments slowing and exits accelerating, it’s not too surprising to see the global company inventory leveling off somewhat in recent years. Through 1H 2014, 13,113 companies were backed by PE investors, though only 190 have been added to the inventory so far this year.
Accelerating this downward trend has been the torrid pace of worldwide exit activity in recent years, as we discuss at length in our upcoming 2H Global PE Exits and Company Inventory Report. Releasing Wednesday, August 20th, the report breaks down global exit trends through several metrics, including exit sizes, hold times, exit multiples and exit types. Also included are regional breakdowns for U.S. and European exit activity, which make up the bulk of worldwide PE exits.
On a global level, over $1 trillion of PE capital has been exited since the beginning of 2011, and exit flow steadily increased each year between 2011 and 2013, peaking at 1,509 exits last year. 2014 is about on pace to match that, with 709 exits recorded through 1H totaling $199 billion. It’s a good time to be a seller: For the first time since the financial crisis, all three major exit ramps (corporate acquisitions, secondary buyouts and IPOs) are at or near historic levels for exit flow. Market trends are working in favor for all three, with IPOs up due to PE-friendly stock markets, acquisitions up due to M&A-hungry strategic acquirers and SBOs up due to strong demand from buy-side PE firms.
In the U.S., quite a few pre-crisis investments are being realized, with almost 20% of all capital exited in 1H 2014 stemming from exit sizes of at least $1 billion. Across the pond, European investors are also exiting quite a few pre-crisis investments, especially through the public markets. IPOs are way up in Europe this year, with 39 listings completed through 1H, already ahead of the 33 in 2013. As opposed to the U.S., though, SBOs have declined noticeably in Europe, partly due to PE buyers blanching at the quality of some of those portfolio companies coming back into the market. The public markets are beginning to realize the quality issue, too, as post-IPO share prices have suffered for many PE-backed listings. Some hedge funds have even taken to shorting PE-backed European stocks as an investment strategy.
The global company inventory of PE-backed companies topped 13,000 through 1H, though the pace has slowed to a crawl compared to earlier years. Only 190 companies were added to the inventory in the first half of 2014, which puts this year on pace to add the fewest companies since the turn of the century. The inventory may have already plateaued in the U.S., which is currently around the 7,600 mark.