PE Deals Vs. Exits: What's Falling Faster?

The number of private equity investments in the US is on pace to decline for the second consecutive year, but that hasn’t done much to change the country’s overall PE investment-to-exit ratio, according to the PitchBook Platform.

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The result is a US PE investment-to-exit ratio of 3.2x so far in 2017, a far cry from the 4.1x and 4.2x marks reached in 2008 and 2009, respectively, during the fallout of the Great Recession. After those peaks, the ratio has hardly budged since posting a 3.2x mark in 2010, when the current post-recession economic expansion cycle began.

Despite the appearance of consistency, PE firms are on pace to strike 3,503 deals in the US this year, down from 4,135 in 2016. That would mark a YOY decline of more than 15%. Exits are down, too, with the sector on pace for 1,083 after 1,266 in 2016 (a -14.5% YOY pace), a noticeably sharp drop-off:

The downward shift is largely a result of increased competition in a private market sector being fought over by firms boasting record amounts of dry powder. It has driven up company values and made buyouts more difficult to carry out. In turn, firms have increasingly turned to add-on deals that are typically less expensive and have the benefit of longer hold times from gradually combining portfolio companies before selling them off.

Another reason for the decrease in exits was explained in our last 2Q US PE Breakdown:

"This decrease is driven largely by the cyclical nature of the industry and a reduction in company inventory over the last few years, as PE sponsors exited companies held through the last recession."

The drop-off is even more pronounced globally. Consider: The industry is on pace for 6,736 PE investments in 2017, down from 8,443 deals last year and 8,845 the year before that (set for a 20.2% YOY decline from 2016 to 2017). PE-backed exits are following the trend; investors are on pace for 2,362 exits after 2,908 exits last year (set for an 18.8% YOY decline). As with the US, both global PE exits and deals have declined significantly, but that has done little to disrupt an investment-to-exit ratio that is on pace to reach 2.9x for the second consecutive year, assuming the current rate of global activity continues.