Global buyouts by private equity firms hit $440 billion

01 March 2018

Global buyouts by private equity firms hit $440 billion in 2017, on a relatively flat deal count to 2016. Private equity firms face stiff competition for lucrative targets, from corporates in particular, with multiples for targets continuing to rise.

Private equity firms have enjoyed strong growth in assets under management, hitting a record $2.5 trillion, while investors have enjoyed strong returns on their investment. The industry is seeing increasingly larger numbers of active private equity (PE) firms, while investors are becoming increasingly active themselves in the investment process.

While M&A activity by private equity firms across Europe was projected to see a smaller increase in activity going into 2017 than into 2016, due to political instability from Brexit and the new US administration, throwing up hesitation, private equity firms remain a key global factor for large capital, seeking alternative assets for strong returns and differentiation. The segment sees investment activity from, among others, large pension funds and sovereign wealth funds. The segment has seen strong growth in terms of acquisition in recent years, while fundraising has reached levels last seen prior to the financial crisis.

However, challenges remain for the industry, with multiples hitting more than 11, while the number of quality targets decreases in the face of stiff competition. Demand for strong returns, and pressure on fees, from limited partners, is creating further pressure on firms. The latest edition of Bain & Company’s ‘Global Private Equity Report 2018’ report sheds light on trends within the industry.

Buyouts in 2017

Deal count among PE firms picked up in 2017, with more than 3,000 deals counted – a slight 2% increase on 2016. The market has seen a slight decrease in activity on the peak in 2014, when there were almost 4,000 deals. However, the boom years of 2006 and 2007 haven’t yet been repeated.

Deal value also saw an increase during 2017 on 2016, with total value up from 369 billion to $440 billion. The Asia Pacific saw the most significant rise in deal value, up 74% from last year, while North America went up by a more modest 10%. The deal value for 2017 was strong, but fell well short of 2015’s $559 billion in value and 2007’s $762 billion in value.

Add-on deals, whereby PE firms acquire companies to bolt-on to existing portfolio companies (buy-and-build stratagems), have been added to the buyout list. The phenomenon has become increasingly common, as a means of, among others, bringing together a number of smaller companies to create synergies that then garner a premium at exit.

Dry powder reserves

While buyouts were relatively high last year, the amount of capital raised hit record heights at $1.7 trillion. The increase reflects increased support from limited partners seeking strong returns on their investment, with private markets seen as more competitive than equities and bonds in particular. Buyout was the third biggest segment by value, with 23% of the total pie, with growth funding in second place (33%), while direct lending direct lending came in at 36% of the total pie.

Putting PE to work

Putting the record level of fundraised capital to work will not be easy. According to researchers, various limitations created by the market, largely poor and overvalued supply, preventing PE firms from making strong returns on investment.

Buyout purchase price multiples

The disconnect between targets, their values and returns, reflects a dearth of market opportunities as high demand from PE firms and corporates, pushes up values and limits choice. Average EBITDA purchase price multiples hit 11.2 in Q3 2017, an increase of 0.5x on Q2 2017. Valuations have been above 10 since 2015, reflecting the long-term trend of premium company valuations.

The increasing level of dry powder, coupled with investor expectations – pressures PE firms to make investments, which ups risks, while also pressuring companies to maintain discipline.

The market is also facing considerable pressure from a rise in the number of firms actively pursuing targets – this is the case in both the PE segment as well as the corporate segment. Corporates, for instance, are increasingly focused on acquiring companies that do not scale, but provide access to, among others, technology and talent. Corporate venture capital deals now make up around 20% of total venture capital investment.

PE firm numbers rise

In the PE segment meanwhile, the number of firms has continued to increase to 7,775, adding further competitive forces to an already busy marketplace.

Hugh MacArthur, global head of Bain & Company’s Private Equity practice, said, “This structural imbalance is, without doubt, the industry’s biggest challenge, stemming from heavy competition for deals, which puts persistent upward pressure on asset prices. In the coming years, this, along with heavy competition and the looming threat of an eventual economic downturn will require PE funds to create portfolio company value from the inside out – through better leadership and execution – or accept middling returns. We could also see more M&A-based deals, including buy-and-build transactions that continue to be a staple of deal making as well as more, bold, large-scale M&A.”