Strength in private equity (PE) deal activity exhibited through Q3 2019 is expected to continue due to record amounts of dry powder and favorable credit markets. The quarter included four mega deals including the leveraged buyout of Press Ganey Associates Inc. ($4B). While deal activity remained robust, economic and political uncertainty drove a continued decline in the number and value of exits, prompting firms to focus more on reducing downside risk in their existing portfolios.
“Record levels of fundraising and the competition for higher quality assets continue to support high multiples, however GPs are focused on downside protection given an uncertain economic backdrop.”
Fundraising ballooned to $191B through Q3 2019, and is on track to surpass the total during 2018. Blackstone Capital Partners closed the largest ever buyout fund in Q3 at $26B. Vista Equity Partners raised the largest ever tech fund at $16B in Q3.
Fund count fell as the number of mega-funds rose.
Deals activity remains stable even though multiples reached 12.9x at the end of September compared with 11.5x in December 2018.
Total deal value for YTD 2019 was $501B, roughly on pace with 2018. Average deal value of $12.9M also matches the first three quarters of 2018.
With valuations so high, exits are down $90B over 2018. IPOs have not yet recovered from an uncertain Q1, and acquisitions and secondary buyouts also slowed.
B2B and the Technology industry continue to be a key focus for PEs and represent 38% and 19% of deal volume through 3Q, respectively. PE continues major inroads into technology, a sector once dominated by venture capital. PE firms are attracted by innovations that have the potential to transform industries. More recent growth may be partly attributable to investors looking to protect their downside by deploying capital in “recession-resistant” industries such as Technology and Healthcare.
Given PEs focus on the Technology and Healthcare industries and competition for assets, these industries have seen an increase in average deal size during YTD 2019 by 50% and 10%, respectively.
Investment in the energy industry continues to struggle with Q3 recording the lowest number of deals in a single quarter since 2010. While deal volume remains low, average deal size also decreased to $13.7M in Q3 compared with $30.3M in Q3 2018.
Like the US economy, PE activity is showing mixed results. Fundraising is strong and deals are at roughly the pace of last year. However, all forms of exit are down. Concerns about the future seem to guide current activity as PEs rapidly try to raise funds so that they can take advantage of any future decline in buyout multiples.
We expect deal volume and value to remain strong through the next couple of quarters due to several factors:
Fundraising has reached record highs and PEs will be eager to invest their newly secured capital. Although a recession would reduce the valuation of portfolio companies, it would also create buying opportunities for well-funded PEs when prices and valuations start to fall.
Several significant buyouts were either announced or rumored during 3Q and would be expected to close during the next couple of quarters. Such transactions include Advent International Corp. and Permira’s potential $16B takeover of Symantec Corp., and Permira’s announced $2.4B acquisition of Cambrex Corp.
Sovereign wealth funds and other institutional investors are increasing their participation in deals by co-investing as well as directly sourcing deals. This trend will probably continue to increase deal volume and value. Examples include Singapore’s GIC sovereign wealth fund co-investment with Ares and Leonard Green & Partners, L.P. in the acquisition of Press Ganey Associates ($4B), BlackRock’s 30% investment in Authentic Brands Group ($875M), and Brookfield Infrastructure Partners’ take-private of Genesee & Wyoming Inc. ($8.4B).
The Federal Reserve has twice cut the benchmark interest rate in 2019 and more reductions are anticipated. Lower rates would continue to support the leveraged buyout market.
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The information presented in this report is an analysis of deals in the private equity industry where the target company and/or the target ultimate parent company was located in the United States of America. Deal information was sourced from PitchBook Data, Inc.
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