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2017 US Private Equity Deal Flow Steady, But Company Quality Suspicious

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In the wake of a particularly eventful year, the US private equity industry is in many ways returning to normal levels, although significant concerns remain. Multiple factors combined to drive down deal flow throughout 2016, resulting in a distinct decline in activity even as total deal value remained robust on a historical basis. Unlike what happened with the downward shift in the buyout cycle between 2015 and 2016, however, expect private equity investors in the US to go forward in 2017 at a pace similar to last year’s.

At the same time, portfolio company quality is still a concern when it comes to exits, given the stagnation in exit activity even as prices stay high. In the 2016 Annual US PE Breakdown, our analysts identify several key takeaways from last year that shaped 2016 and will continue to affect this year, among which are:

  • Pricing stifles deal flow in 2016
  • Median equity contributions jump to 5.4x EBITDA
  • Tech and energy investment experience growth
  • Heightened company inventory limits available targets

Grounded in datasets covering everything from fundraising to transaction multiples, this Breakdown, produced in partnership with Merrill Corporation, delves further into those key points and more.


Key takeaways

  • Pricing stifles private equity deal flow in 2016
  • Heightened company inventory limiting available targets while also raising suspicion around portfolio company quality
  • Tech and energy investment experience growth
  • Median equity contributions jump to 5.4x EBITDA
  • More managers than ever before hit their fundraising targets in 2016

If 2014 was a record-setting year for private equity, and 2015 a turning point, then 2016 can be characterized as the first step toward normalcy. Buyout activity receded amidst the growing concerns about global trade, rising populism and central bank policies that we know all too well. It must be noted, however, that PE transactions occur on a deal-by-deal basis, not a global basis. As such, managers have continued to find pockets of growth and opportunity, particularly in the tech and energy sectors.

In today’s tough environment, many large corporates have resorted to competing with private equity firms, thereby pushing up multiples and squeezing out any margin for error. Due diligence and deal sourcing have become as important as ever before, and firms will have to become more creative in the ways they produce alpha and hedge against any downside.

PE exits and fundraising also fell in 2016, though more managers are meeting their stated fundraising goals. As we look to the coming year, we expect more of the same in terms of deal flow, but a more competitive environment could drive down returns and prompt some hesitation around future allocations toward the asset class. In the end though, the best managers will continue to garner outsized contributions and return sufficient capital to their partners.

We hope this report is useful in your practice. Please feel free to contact us at [email protected] with any questions or comments.



Transaction Value Stays High


Deal value remained robust

$649 billion in private equity transactions were completed across 3,538 deals last year, representing 12% and 14% year-over-year decreases, respectively. As we noted throughout the year, the fallingoff can be mostly attributed to both an expensive market and a lack of quality acquisition targets. Median EV/EBITDA for M&A transactions (including buyouts) in the US this year hit 10.9x, nearly a full turn higher than 2015’s 10.0x and far above the 7.9x figure we recorded in 2010.

Private Equity

Strategic competition here to stay?

These higher multiples were caused in part by competition from strategic acquirers, which continues to hamstring private equity dealmaking. At the time of this writing, the S&P 500 was trading at a price-to-earnings ratio of approximately 26, compared to a post-financial-crisis low of about 13.5 in September of 2011. That is, on average, a company in the S&P 500 has about double the purchasing power now, denominated in their own stock, as they did five years ago. Further, this multiple expansion also re-emphasizes the pricing level at which PE has to play at today, thus, it’s no wonder that PE firms are feeling some of those side effects. In 2017, we’ll be keeping a close eye on public company valuations and their effect on PE pricing.

Private Equity

Lack of buyout targets

In any given sector or geography, there are a finite number of companies that can reasonably service the debt loads necessary for producing the returns that buyout producers expect. Mid-way through 2016, there were 7,168 PE-backed companies in the US, a 46% increase from the 4,923 companies in 2009. This has left investors with limited quality options for putting capital to work. Not to say that the US economy is by any means saturated in terms of financial sponsorship, but opportunities will become harder to find if the pace of capital investment continues to exceed economic growth.

Add-ons keep adding up

With prices as high as they are, it has become imperative for firms to use buy-and-build strategies in order to blend multiples and create a lower aggregate pricing for their portfolio acquisitions. In addition, managers can utilize this strategy to ensure a higher exit price as they build a more comprehensive business. Addons made up 64% of buyout activity last year, up from 61% in 2015 and the highest proportion we’ve ever recorded. As this trend continues to play out, deal sourcing will become even more important and singleplatform operational improvements will be expected at the bare minimum. Most notably, there were 283 addons in the healthcare industry, which continues to see increased consolidation amidst speculation about potential changes to the Affordable Care Act.

IT out-computes the rest

The tech sector saw more investment from private equity firms in 2016 than it did at any time in the last 15 years. 567 deals were completed, worth a total of $159.8 billion. Granted, $60 billion of that sum can be attributed to the Dell/EMC take-private that closed in September. But even excluding that transaction, PE investment in the IT sector would have grown by 10.8% this year. As more venture-backed companies stay private for longer amidst a sluggish VC-backed exit market, we see an opportunity for PE investors to step in and help provide liquidity for aging venture portfolio companies. Further, we believe the PE operational and management model is well-suited for already established and fast-growing companies, and the ability to enter transactions as patient capital will also allow PE sponsors to move such companies through lucrative exits down the road.


PE investors purchased $55.8 billion worth of energy companies in 2016, up 31% from the prior year. It seems as though investors are finally getting used to $50-a-barrel oil and that the gap between buyer and seller expectations for the future of industry has narrowed. Supporting the truism that necessity is the mother of invention, many E&P companies are finding new ways to stay profitable in the low oil-price environment. Lastly, all signs from the incoming administration point to deregulation in the industry, which could spur a new wave of investment activity.

Private Equity

Pricing pressures take toll

Deal multiples & debt levels

Frothy valuations, few opportunities

As previously mentioned, median enterprise value surged to 10.9x EBITDA for M&A transactions (including buyouts) this year. Pricing pressures came from the aforementioned strategic acquirers, as well as competition amongst private equity firms, which have a collective $852 billion in dry powder globally. Meanwhile, many of the obvious buyout targets have already been acquired, and the US remains an attractive target for foreign investors searching for both yield and security. In short, there are too many dollars chasing too few feasible investment opportunities. To stay competitive, firms will have to focus more on deal sourcing. As the old saying goes, “You make your money when you buy, not when you sell.”

Equity contributions on the rise

For those deals that are completed (and there are still plenty), firms are being forced to use more equity as a percentage of the total deal value. Median debt percentage for PE buyouts and M&A in the US fell to just 50.5% of enterprise value this year, a rather dramatic decrease from the 56.8% observed last year. Money center banks are limited to lending at no more than 6.0x EBITDA, and many nontraditional lenders are either unable or unwilling to underwrite loans at such high valuations, given the bifurcation we’ve seen in company quality. Thus, the equity contribution becomes a larger slice of the pie. The median equity/EBITDA ratio jumped more than a full turn to 5.4x this year. Less leverage will make outsized private equity returns harder to produce, but companies with less debt on their balance sheets will be more equipped to weather any potential downturn. In order to complete deals in a timely manner, investors will have to pay cash up front and depend on financing post-close.

Private Equity

Private Equity

Outliers drive disparities

Deals by size & sector

Private Equity

Private Equity

Read the full report here.

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