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PitchBook Report Finds Private Equity Investors Show Reluctance to Complete Deals in Third Quarter Despite Near-Record Fundraising

Stubbornly High Prices and Limited Acquisition Targets Are Primary Contributors to Slowdown in Deal Making

SEATTLE, Oct. 12, 2017 /PRNewswire/ -- In the first three quarters of 2017, PE firms deployed $401.7 billion across 2,820 deals, representing an 11% decline in deal volume compared to the same period last year, according to PitchBook's 3Q 2017 US Private Equity Breakdown report. The slowdown in deal making comes as a surprise given fundraising in 2017 is nearing the highest levels ever tracked. In the third quarter, Apollo Asset Management closed a $24.7 billion fund, making it the largest buyout fund ever raised. While deal making was challenged by several factors, including price and quality issues, PE investors continue to make add-on acquisitions a key strategy in 2017, accounting for 64% of all US-based buyouts. At the same time, the number of exits in 3Q dropped 20% from 2Q 2017, despite PE investors being eager to exit the nearly 40% of PE company inventory acquired over five years ago. As PE investors struggled to find strategic buyers, the proportion of secondary buyouts increased to 50% of exits.

"As evidenced by near record-breaking fundraising, confidence in the PE asset class remains strong, despite headwinds investors face with elevated prices, high levels of dry powder and a decrease in activity from strategic acquirers," said Nico Cordeiro, analyst at PitchBook. "Investors have implemented strategies to adapt to the current market environment, but are still under pressure to put capital to work and source exits for their inventory of aging portfolio companies. With several announced deals with initial valuations above $1 billion, PE deal making could end up finishing the year strong."

Add-On Acquisitions Become Key PE Strategy Amidst Price and Quality Challenges
In 3Q 2017, PE firms invested $163.4 billion across 959 deals, up from $115.7 billion across 859 deals last quarter. Despite an uptick in 3Q, overall PE deal making is down compared to 2016 and is most noticeable in the lack of mega-deals. The largest PE investment this year was BDT Capital Partners' $7.16 billion buyout of Panera Bread, which is significantly smaller than years' past, including PE-backed Dell's $67 billion acquisition of EMC in 2016 and PE-backed Heinz's $55 billion acquisition of Kraft Food Groups in 2015. The reluctance in PE can be attributed to several factors, one being a supply and demand issue. Record M&A activity in 2015-2016 has left a smaller number of quality investment opportunities, adding to pricing pressures for promising companies. Since 2016, EV/EBITDA multiples have held at 10.5x, a steep multiple on a historical basis. To cope with the high-priced environment, PE firms have continued to focus on add-on investments (64%) as these deals tend to have lower price multiples and help with growing platform companies. The software industry, which now accounts for 68.3% of deals in the IT sector, has served as a source of growth for PE investors.

Secondary Buyouts Provide Liquidity Relief for Aging Portfolio Companies
In the private market's current state, all indicators point to a sellers' market, with sky-high valuations, ample dry powder, aging portfolio companies and healthy corporate balance sheets. Despite these factors, PE-backed exits have experienced a 20% dip from 2Q 2017 with just 224 exits in the third quarter totaling $40.8 billion. One cause of the decline in exits is the recent pullback from strategic acquirers. In 2017, corporate acquisitions have made up just 46% of all exits, the lowest percentage the PitchBook Platform has tracked. On the flip side, secondary buyouts made up the highest percentage ever tracked, or 50% of total exits. PE firms may be feeling pressure to exit long-held portfolio companies as 38% of US PE company inventory was acquired over five years ago. With PE firms also needing to deploy record levels of dry powder, secondary buyouts will likely remain a prominent exit strategy.

Fundraising Nears 2007 Record in 2017 With Fewer, Larger Vehicles
PE fundraising is near its all-time high as a result of the asset class' continued outperformance of public markets and other alternative assets. What's more, fund managers are raising larger sums across fewer vehicles. In the third quarter, $62.4 billion was raised across 58 vehicles, the lowest number of funds since 2Q 2016. Median fund sizes have skyrocketed in recent years, currently sitting at $265 million, which is the highest PitchBook has recorded since 2006. The number of mega-funds raised this year has also reached a decade-high, accounting for 54% of all capital raised by PE funds in 2017. Leading the way on the fundraising trail was the aforementioned Apollo Global Management and its $24.7 billion fund, which dethroned Blackstone Group's 2007 vehicle worth $21.7 billion as the largest buyout fund ever raised.

Additional findings in this report include:

  • Q&A: Merrill Corporation
  • Deals by size and sector
  • PE activity in Software
  • Q&A: Murray Devine
  • Exits
  • Q&A: Twin Brook Capital Partners
  • Fundraising
  • League Tables

Download the full report here.

About PitchBook
PitchBook is a financial data and software company that provides transparency into the capital markets to help professionals discover and execute opportunities with confidence and efficiency. PitchBook collects and analyzes detailed data on the entire venture capital, private equity and M&A landscape—including public and private companies, investors, funds, investments, exits and people. The company's data and analysis are available through the PitchBook Platform, industry news and in-depth reports. Founded in 2007, PitchBook has offices in Seattle, New York and London and serves more than 12,000 professionals around the world. In 2016, Morningstar acquired PitchBook, which now operates as an independent subsidiary.

Contact: Bailey Fox, 1 206-823-3022, [email protected]



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