For private equity sellers, the good times are still rolling. In fact, after a slide from the end of 2014 to 1Q, capital exited worldwide in 2Q surged to over $194 billion. That leaves the first half of 2015 comparing favorably to last year’s massive numbers, as PitchBook’s 2H 2015 PE Exits & Inventory Report explores in further detail. It also produced the first decline in median hold periods in years, suggesting PE firms are finally finding success in selling off their aging holdings.
PE Exits And Inventory 2H15 Report
Overview
The good times are still rolling for PE sellers. In fact, the seller’s market is rising above even the historic numbers seen last year in terms of value. 2Q saw a gargantuan $194 billion exited through 516 sales worldwide, pushing first half totals to $327 billion across 1,026 liquidity events. That figure puts 2015 on favorable footing compared to last year’s massive haul of $587 billion. In addition, the total capital exited in the second quarter was 16% higher than the previous high of the past four and a half years—$168 billion in 3Q 2014. These vast sums speak to just how heated valuations have grown.
Soaring public markets have elevated public valuations, in turn boosting private asset prices substantially, making it easy for PE firms to primarily focus on the sell side. Strategics are still competing for plum PE portfolio companies to keep growing as organic development remains anemic, which only further pushes prices upward. It’s not only strategics that are highly competitive these days; PE dealmakers still speak of how hard it is to close buys in today’s dealmaking environment, which has contributed considerably to the surge in secondary buyouts (SBOs). General partners (GPs) faced with everlengthening hold periods—and the specter of zombie funds—are finding it expedient to court fellow firms as prospective buyers. It may not necessarily be to the liking of limited partners (LPs) yet SBOs do have their advantages, namely, putting dry powder to work and getting at least a moderate return. There’s been plenty of slacking on the dealmaking side already: Barely two investments were made per exit in 1H, the lowest ratio of the decade.
It’s worth noting that in 1H 2015, SBOs and sales to strategic buyers have far and away driven the lofty exit totals. What this portends for the back half of the year is a sustained seller’s market in all likelihood, as the nonbank lending environment remains amenable, any uptick in interest rates has long been anticipated or baked into terms, and corporates still boast plenty of cash. That said, there is a sense of growing caution in the marketplace; we’ve heard reports many dealmakers anticipate slowing growth over the next 12 months. 2015 could turn out to have been frontloaded after all.
PE Exits by Type
Between 2010 and 2014 the number of SBOs and corporate buys grew steeply, with last year topping out at a mammoth 1,123 acquisitions by strategics and 822 sponsor-to-sponsor transactions. Both highs of the past decade, it’s still likely 2015 could match those lofty totals presuming exit activity doesn’t slump. The first half of the year recorded 545 sales of PE-backed holdings to corporate buyers and 422 secondary sales, the latter making SBOs the highest proportion of total exits since 2007.
Strategic buyers are snapping up PE portfolio companies, bolstered by healthy stock prices and cashrich balance sheets. In aggregate, corporate acquirers have paid out $240 billion for PE holdings in 1H 2015 alone. Such a vast sum testifies to not only the success PE sellers have achieved but also the appetite of corporates for PE holdings.
Meanwhile, PE firms are finding easier targets in their counterparts’ portfolios than elsewhere. Although the sums PE firms have been spending on other PE holdings has declined somewhat, this year is on pace for about $124 billion. That would put it more in line with 2012 or 2013, which saw $128 billion and $120 billion, respectively.
Among decreases, however, the slump in PE-backed IPOs this year is paramount. Considering the tumultuous state of global markets thus far in the year, it’s likely that PE firms are unwilling to risk debuts of any but their best-prepared companies. Fellow PE firms on the hunt to put capital to work or the corporate M&A scene are safer bets.
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