Four Trends in the US Private Equity Industry You Should Know About

There has been a surge in US private equity (PE) dealmaking throughout 2018 – 3,501 deals worth $508.8B closed, with the majority of transactions occurring in the third quarter. But what have been the trends in this industry and what has caused the increase in dealmaking?

 

High Value Transactions:

A number of reasons have recently fuelled private equity firms paying higher multiples for target companies, with PE firms willing to meet the offers of a trade acquirer. 

This is as a result of competing with trade acquirers for quality assets because they are cash rich due to recent tax reforms and low interest rates leading to the availability of cheap debt. What’s more, private equity can compete with this as they have the capital available to deploy because of record levels of dry powder available.

This has seen a spate of mega deals, notably Broadcom’s acquisition of CA Technologies for $18.9B.

 

Add-Ons:

Private equity firms traditionally seek to buy companies utilising their own funds but, recently, have started to buy through companies that are already owned by buyout funds, making add-on acquisitions within six months to one year following completion of an acquisition.

This is due to the high multiples aforementioned – a private equity firm paying more for a target needs to ensure it can cut costs in other ways to achieve the maximum profit for the business when it divests. Therefore, if the PE firm buys a company that it can add-on to another company in its portfolio, cost synergies can be leveraged.

This type of deal now accounts for two-thirds of buyouts, with 2018 on track to be the fourth straight year with a deal count above 2,000. In fact, in the first three months of 2018, 70 per cent of leveraged buyouts were bolted onto PE portfolio companies. As well, the value of such deals has also seen an increase.

 

Decline in Fundraising:

Fundraising has slowed in the first nine months of 2018 compared to record levels in 2017. However, rather than this be a cause for alarm, it could just be a correction to the norm – with record dry powder available, only so much money can be raised.

Fundraising hasn’t declined in all aspects either, with the amount of first-time fundraising increasing. In the first half of 2018, thirteen different US firms had $3.5B, equalling the previous year’s total in terms of fund quantity, and topping it in terms of dollar value. If that pace is maintained, the $7B raised for first-time funds would be the second-highest annual total of the past seven years.

 

Sectors:

The healthcare sector is faring particularly well with PE as there are a lot of factors that are particularly attractive to PE firms, particularly transformative technology innovations. An example includes Apollo Global Management, which owns RCCH HealthCare Partners, agreeing to buy LifePoint Health for $5.6B.

In conjunction with this, other sectors that have seen PE investment are those in technology, with PE firms securing digital innovations to improve the performance of portfolio companies.

 

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