2017 a solid year for PE

May 2018 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

May 2018 Issue

2017 was a strong year for the private equity industry, according to the new ‘Global Private Equity Report 2018’ from Bain & Company.

Though global deal count was essentially flat, growing just 2 percent to 3077 deals, global buyout value, including add-on transactions, grew 19 percent to $440bn. A string of large public-to-private transactions and ‘add-on’ deals – which have become increasingly common, as a means of bringing together a number of smaller companies to create synergies that then garner a premium at exit – helped bolster global deal value.

Private equity firms enjoyed strong growth in assets under management, hitting a record $2.5 trillion. Investors saw strong returns as exits generated healthy gains. 2017 was also a bumper year for fundraising, with growing investor enthusiasm producing the largest buyout funds ever raised in the US, Europe and Asia.

However, there are some caveats to the progress made in the industry last year. Notably, it is becoming harder for GPs to find new targets and close new transactions at attractive prices. Record-high deal multiples and heavy competition for assets, from both the private equity and corporate sectors, have been the two main headwinds impacting deal activity. Average purchase price multiples for buyouts rose to historic highs last year.

“Investor enthusiasm for private equity endures, leaving the industry awash with cash. This is both a blessing and a curse,” said Hugh MacArthur, global head of Bain & Company’s private equity practice. “Funds have ample money to spend, but the competition for deals is fierce. With deals being done at record-high multiples, the right sort of diligence is more essential now than ever before.”

In total, the private equity industry raised $701bn last year, nearly overtaking the record set in 2016. Buyout funds raised $301bn, up 27 percent year-on-year. Mega buyout funds continued to perform impressively, continuing the trends extending back to 2016. The $24.7bn Apollo Investment Fund IX was the largest single buyout fund raised in history. In Europe, the $18bn CVC Capital Partners Fund VII was the largest euro-denominated fund ever raised at €16bn. The largest-ever Asia-focused buyout fund – KKR’s $9.3bn Asian Fund – was also raised last year, and is particularly notable given that the region has not been a buyout market historically. In total, mega buyout funds raised $174bn in 2017, 58 percent of that year’s buyout total, a significant increase from $90bn in 2016 – 38 percent of that year’s total. All 10 of the largest buyout funds exceeded their fundraising totals, and could potentially have raised more.

Dry powder is also accumulating at a rapid rate. By the end of the year, buyout funds had a total of $633bn in unused capital, with mega buyout funds accounting for $286bn. The total private equity dry power peaked in December 2017 at $1.7 trillion. To put some of this capital to use, private equity should engage in larger scale M&A transactions going forward. This is particularly notable at a time when private equity’s share of overall M&A activity globally declined in 2017 for the fourth year running. “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,” said Mr MacArthur. “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.”

Richard Summerfield