Multiple datasets help convey why the current private equity environment may represent a new norm in terms of dealmaking, yet one of the more telling data points is the type of company that buyers are targeting. Since the third quarter of 2015, there has been a distinct increase in the proportion of companies with revenue growth exceeding 10%.
Although the proportion of companies experiencing decreased growth has fluctuated considerably, the increased focus on growing companies speaks to the difficulties inherent in deal sourcing nowadays. The level of competition is at such a pitch, particularly in light of hefty dry powder stores, that PE buyers are considering relatively healthier companies than before.
Granted, historical trends indicate that current proportions aren’t unprecedented, but they testify to the challenges facing PE investors. The larger question now is whether this trend has shifted the operating environment into a new equilibrium where PE firms will continue to consider companies that typically wouldn’t fall under their purview.
Perspective is necessary for accuracy, given this unique situation. The buyout industry has rarely enjoyed such largesse from investors, and never has it encountered such competition from peers, given the growth in the popularity of typical PE strategies. Moreover, one could argue the unique monetary policy approaches adopted by the majority of developed nations—where most PE firms operate—have distorted asset valuations to a noticeable degree.
Accordingly, it is not so much that PE strategies themselves have changed as they were forced to adapt given the shift in key underlying drivers. There is a new norm for PE buyout firms now, but that norm could very well shift given leverage regulations or a washout among fledgling fund managers.