PE-backed company inventory swells to new heights in the US

November 9, 2018
Between 2004 and 2008—considered by many to be the boom days of private equity—PE's combined company inventory climbed 74% in the US, per our 3Q 2018 M&A Report. Over the span of five years, in other words, the number of companies under PE control came fairly close to doubling. That was an unsustainable pace in hindsight, and inventory growth in the intervening years has slowed dramatically (up 26% between 2009 and 2013, and up only 20% from 2014 through 3Q 2018).

The percentages may be falling, but they're still well above zero, and with fresh dry powder starting to hit the market, it's unlikely that PE's inventory will shrink in the near future without some sort of macro development.

Compare PE's company inventory growth to the number of active firms in the market. Last year, the number of active PE investors shrank for the first time, falling about 1%, per a recent PitchBook analyst note. We expect 2018 to see another decrease, though we'll have to wait one more quarter to confirm. What we can see with some certainty, however, is hard evidence of industry-wide consolidation. Going back to the 2004 to 2008 timeframe, the number of active US PE investors rose each year by around 10% to 15% or so, which helped fuel the aforementioned spike in PE's inventory. The only year that didn't conform was 2008, which saw only about 5% more investors than the prior year.

What the industry didn't know at the time was that the financial crisis would have a lasting impact on the number of first-time investors entering the market, and 2008 was a harbinger of things to come. In the following years, the YoY increase in active investors never touched 10% or more. Meanwhile, PE's combined inventory continues to climb at a pretty even pace, but now with fewer investors involved. Even if the number of active PE firms levels off (or drops marginally), the tradeoff is a somewhat saturated market with far fewer untouched targets compared to a decade ago.

This column originally appeared in The Lead Left.

Read more about inventory growth in our 3Q 2018 M&A Report.

Related content