Private equity sector reaches 10-year peak and drives M&A activity

24 July 2018

Private equity firms saw another solid year of fundraising last year, building out their dry powder reserves to more than $1 trillion. Continued demand for their services, easy money and competition for targets has resulted in a mixed blessing. Companies are focused on acquiring companies that can benefit their portfolios and will increasingly scour the globe for deals.

The world remains in a period of uncertainty as global power plays unfold. Yet while geopolitical ramblings continue, with the possibility of an intensifying trade war looming around the corner, markets have in recent years stabilised following more than a decade of rebuilding since the financial crises.

One segment that has seen steady growth is private equity (PE). The segment has seen growing interest due to the availability of cheap capital on the back of low interest rates, and high exit demand as companies seek to capitalise on a strong market and attractive deal multiples. Accounting and consulting firm Deloitte recently completed a survey on the sector, as part of its wider series of trend reports in the private equity sector.Private equity deal value

Just prior to the financial crises, private equity activity saw deal value boom to almost $700 billion. The following year the financial crisis hit, depressing private equity activity to less than $200 billion by 2009. The sector went into hibernation, focused on keeping companies acquired prior to the crisis afloat and growing – with much of that stock exited during the sales booms between 2015 and 2016.

New acquisitions meanwhile recovered – hitting the highest level since the financial crises in 2017 with total value in excess of $460 billion, a 28% increase on the year previous. The study also found that private equity players were a driving force behind M&A in 2017, in part to support portfolio companies growth. “The private equity sector is looking to create value and they are looking beyond cost synergies towards technology induced transformation,” stated the authors.

PE dry powder by vintage year

Dry powder – funds available for investment but for which no investments have yet been found – continued to pile up, topping $1 trillion last year – with considerable sums built up over 2015 and 2016. The rapid addition of financial clout means that many of the companies in the segment are on the lookout for attractive propositions – with downside risks of poor due diligence and buying frenzies. The high level of available dry powder has also seen competition increase, putting upward pressure on valuations.

The consequences are according to the report’s authors that private equity firms may look to co-develop their portfolio propositions across a range of sectors by synergising their holdings. US companies are for instance as a means to widen their buying window increasingly extending the investment scope of their portfolios from 10 to up to 20 years, backed by the creation of permanent capital funds.

PE deal value by sector in billion

Investors were particularly interested in TMT businesses in 2017, which drew almost $100 billion last year, followed by consumer businesses, which saw $85.7 billion in investments. Real estate ($72.7 billion), financial services ($61.7 billion) and energy & resource ($56.1 billion) rounded off the top five in terms of invested value.

The researchers note that deal values in financial services and life science & healthcare were at the highest level since 2008, while real estate hit the highest level since 2006 – reflecting a strong preference for property investment globally. The firm also expects continued growth in energy & resources, which has seen solid growth in recent years as demand for new forms of energy gain prominence.

PE deal value by target region

In particular North America has seen a resurgence in deal activity: the region’s % of total activity foundered after the 2007 crisis, while in 2016 the region’s activity was on par with that of Europe. The Asia-Pacific region boomed again in 2017, following a much slower 2016. The research further notes that cross-border activity between the US and Europe has increased, with more and more funds from the US engaging in activity in Europe – in which European players have sought companies in the US to expand their revenue streams as well as additional capacity to their portfolio companies in Europe.

Related: European private equity market to see solid 2018 on strong fundamentals.

Firms struggling with turning M&A deals into equity value

18 April 2019

At a time when merger & acquisition activity is on a high, new research highlights that a majority of deals closed aren’t in fact contributing to equity improvements. 

To come to their conclusion, researchers at Willis Towers Watson and Cass Business School analysed the performance of all deals closed in the first quarter of this year with a deal value of above $100 million. For all those deals, 180 in total, the share price of the acquirer was tracked, and benchmarked against an index (MSCI World Index) which monitors equity performance across 20+ developed countries. 

The analysis found that across all regions globally, deals on average had a negative result on the equity value of the acquiring party. Buyers in North America and Asia-Pacific in particular struggled with value creation from their acquisitions. In the US and Canada, companies that were involved in a takeover or merger had a negative performance of 10.1 percentage points compared to the North American index. Asia Pacific buyers lagged 5.0 percentage points behind their regional index. 

Globally, the average stood at 5.4 percentage points behind the index. “The international M&A market as a whole is showing disappointing results, on the back of a volatile transaction climate and global political uncertainty, from trade wars to increasing protectionism,” said Gabe Langerak, a Dutchman who leads Willis Towers Watson’s Mergers & Acquisitions practice for Western Europe.Firms struggling with turning M&A deals into equity valueEurope however bucks the trend and is the only region where large mergers & acquisitions in the first quarter of 2019 had a positive impact on the stock prices (2.8%). Langerak: “The relatively stable – or less unstable – political and economic situation seems to turn out beneficial, and as a result European companies have outperformed their international peers.” It is not just a short term catch – the continent has been performing better for years, with the three-year average at 5.1% above the index. 

Striking, according to the researchers, is that international deals are outperforming national deals. For example, cross-border transactions score 0.9% higher than the index, while cross-regional deals even surpass the index by 3.1%. 

While the ‘financial’ performance of M&A deals is by no means impressive, there are however little signs of deal activity to slow in 2019. “Growing cash reserves, technological disruption and the stagnating growth of emerging markets are still pushing companies towards the M&A market,” explained Langerak. A recent report by Bain & Company found that global merger and acquisition activity spiked last year, growing from $2.9 trillion in 2017 to $3.4 trillion in 2018

The role of private equity, which accounts for a large share of deal activity, is another force lifting M&A activity. Investors are cash rich, and face pressures to spend the money in order to help their backers (mostly institutional investors and family offices) reap better than market average returns. According to one estimate, private equity now sits on $1.7 trillion of funds that is available but can’t be invested (‘dry powder’), with investors struggling with higher multiple and a limited supply of top, well priced targets. “As potential candidates now seem more expensive than during previous M&A peaks, such as in 1999 and 2008, it is more difficult than ever to close successful deals.” 

Langerak concludes with a tip for deal makers; “For M&A experts that want to make a move, it is key to focus on selecting the right acquisition candidates. Proper preparation, integration and the right people are essential to gain the right insights before taking a leap.”