Private Equity buyout exit and deal value slows down as market normalises

Private equity globally saw a slight dip on buyout-backed exists last year, as total value fell to $328 billion. A decrease in pipeline companies is partly to blame for the drop in exit value, as the pre-crisis stock has almost completely been, or is in the process of being, exited. New acquisitions were down too on the year previous, falling to $257 billion from $297 billion.

The global private equity (PE) industry has had a good run of results in recent years, the past two in particular saw record levels of buy-out activity as well as exits. In the latest annual ‘Global Private Equity Report’ from Bain & Company, the management consulting firm explores the state of the PE market and key industry trends.

Exit activity

Global buyout-backed exit value came in at $328 billion last year, down somewhat from the previous two years, at $423 billion and $458 billion respectively, but well above the values noted in the years between 2010 and 2013. Global buyout deal value too saw a slight dip on the previous years, falling to around $257 billion from a recent peak of around $297 billion in 2015 – although well below the 2007 peak of $683 billion. Capital raised came in at the highest level since 2010, at around $220 billion in 2016, significantly more than the around $180 billion realised in 2015.

Deal volume of buyout-backed exits in particular saw a steep decline from the years previous, falling to around 1,000 deals compared to 1,250 in 2015 and 1,300 in 2014. Contraction was noted across all regions in 2016: Europe continued to see a drop in buyout-backed exists, while North America and Asia too suffered relative declines to the year previous.

The reasons for the drop in activity in Europe, where volumes declined by 19% and value by 28%, are according to Bain mainly related to key uncertainties around Brexit and the wider political situation in Europe. The broader, global slowdown in exits is largely the result of decreases in the asset pipeline as companies finish existing stock built up during, and in the years just prior, to the financial crisis.

“Given that exits flow from the deals done in previous years, the decline in exit value and count in 2016 wasn’t much of a surprise,” said High MacArthur, who leads Bain’s Global Private Equity Practice. “After several years, the industry has finally normalised through the exits of the massive deals done in 2006 and 2007, like a snake digesting an elephant-sized meal. So, while not quite the blowout of 2014 and 2015, last year still delivered an impressive showing overall for liquidity.”

Exits tended to occur through sales to strategic buyers, which took around three quarters of the total deal value, sponsor-to-sponsor deals came in second, with similar deal values on the year previous. The IPO sector took a hit however, in part due to the wait-and-see posture taken by companies in the face of market uncertainty.

The large number of strategic exists reflects continued strong demand from corporates. Organic growth remains difficult to come by in a number of markets, while cash remains relatively cheap – creating strong conditions to acquire well positioned companies to achieve synergies or capture new market opportunities following from the acquisition.

Deal activity

Total deal volume hit 257 in 2016, down slightly on the 297 deals recorded in 2015, and similar in number to 2013 and 2014, at 257 and 268 respectively. Activity has remained relatively stable over recent years in terms of volume, although it stands far below that of the two years prior to the crisis when deal volumes of almost 700 were recorded.

In terms of deal activity, 2016 heavily favoured larger deals, while smaller deals suffered. The $1 billion to $5 billion category saw the biggest increase, jumping 30% on the year previous. Mega deals fell 100% however, while those in the $5 billion to $10 billion category too saw a significant decrease in buyouts, falling 76% on 2015. The small deals segment decreased by almost half on the year previous, falling by 46%, while the next category up, the 100 million to $500 million, had a decrease of 11%.

One of the reasons for the large value in buyout-backed exits in recent years, aside from increased strategic interest, is the sale of pre-crisis stock. The median holding period for the industry increased to 6.1 years in 2014, before dropping to 5.3 years as PE companies begun to sell their acquired companies in response to improved market conditions. As it stands, little of the pre-crisis stock remains unrealised, with around half of the 2007 portfolio companies now part of fully realised deals.