Private equity deals insights: Q1 2018

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The Q2 2018 deals insights will be released on Thursday, July 26. Please bookmark this webpage and check back with us.

Market summary

In Q1 ’18, US Private Equity (PE) sponsors remain cautious in executing deals for new platform companies as valuations remain elevated, despite the abundance of dry powder. Therefore, PE deal activity declined in the first quarter of the year, with pockets of increased activity found in add-on deals for existing private equity portfolio companies, as well as increased carve out activity.

Following a sustained period of growth, fundraising sharply declined in the first quarter of 2018. The beginning of the year saw $36.6 billion of capital raised across 55 funds, marking a 34% decline in funds raised by value compared to Q1 ‘17. However, enthusiasm and appetite from LPs is still strong as many have increased their allocations to PE, but have been spreading capital across fewer funds. Larger funds continue to attract more than half the capital raised in the quarter.  

The search for quality assets will continue to expand globally, with some potential effect of tax reform. Additionally, PE sponsors will  focus on their portfolio companies to get ready for exits in a period of high valuations. Accordingly, deal team resources have seen a shift toward finding the right add on opportunities to leverage the natural multiple arbitrage available for add-ons, as well as cost savings opportunities.

Trends and highlights

  • Deal value and volume declined in the first quarter of the year, compared to Q1 ’17.
  • Add-on acquisitions reached new levels, accounting for 70% of all PE buyout activity in Q1 ‘18. Close to 33% of PE-backed companies participated in at least one add-on acquisition.
  • Mega-deal activity grew in Q1, In March 2018, Carlyle Group and GIC announced the acquisition of Akzo Nobel’s chemicals business for €10.1bn. In January, a Blackstone Group-led investor group announced the acquisition of a majority stake in Thomson Reuters’ financial-information business for $17bn. We expect this trend to continue.
  • Growth equity transactions represented 25% of all PE deals in the first quarter, representing a growing percentage of total deals. We attribute this trend to continued interest in the software sector, and particularly in earlier stage companies.
  • In order to continue to outpace market returns in a crowded environment with high valuation, PE firms must focus on operational excellence and be creative in approaching value creation.