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Private Equity remained resilient in 2019, despite a drop-off in the second half of the year. The first six months were particularly impressive, with buyout volume keeping pace with the first half of 2018. Funds kept moving on deals, particularly as interest rates remained low and credit availability relatively high, with private credit funds increasingly providing flexible—and larger—financing packages for Private Equity backed deals. This has driven ever-larger fundraisings:
Average sizes of U.S. private debt funds have risen to more than $1 Billion USD since 2016, when they were just under $700 Million USD (Source: Preqin statistics).
VENTURE CAPITAL MARKETPLACE (Updated Fall of 2019, next update coming 2Q 2020):
The year of 2018 saw a total of $254 Billion USD invested globally into approximately 18,000 startups via venture capital financing, which is about a 46% leap from 2017’s figures, with 52% (approximately $131 Billion USD) landing in the United States alone.
2019 figures are still coming to light, but initial reports show that 2018’s pace has abated to an extent. Crunchbase data shows first quarter deal volumes of $75 Billion USD, a growth of just 6% Year-Over-Year. The reasoning behind this slowdown points primarily to dampening appetite for Chinese investments. The second and third quarters are historically the most active investing periods, so as the year unfolds, a clearer picture of this trend will appear.
Despite the industry appearing relatively healthy, an unprecedented trend of fewer funded companies, but larger round sizes has emerged. Because 2019 seems to be bringing an end to the current run in the box set of VC’s annals, the period bookended between Facebook’s 2012 IPO and Uber’s 2019 debut is a fascinating one to look back on.
Reasons for this trend of fewer funded companies:
There are less investable companies out there
Investment Standards have risen and become more concentrated
Inflation from non-VC's participating more in Venture Capital deals
FUNDS & GAINS:
At the same time, Private Equity funds have also been raising significantly larger funds than in the past. Blackstone, for example, broke a record by raising $26 Billion USD - the largest Private Equity fund ever - as investor capital increasingly concentrates at the larger end of the fund spectrum. Preqin figures for 2018 show that 62 percent of the $426 Billion USD was directed toward funds of $1 Billion USD or more, and that the ten largest funds accounted for almost a quarter of this. Private Equity dry powder has reached US$1.54 trillion at the end of June 2019, a record high.
Dry Powder: refers to cash or marketable securities that are low-risk and highly liquid and convertible to cash. Funds held as dry powder are kept in reserve to be deployed in case of emergency.
COMPETITION HEATS UP:
Dry powder and available credit are underpinning continued deal activity by Private Equity Firms, but they do not have the market to themselves. Strategies remain active and increasing numbers of Family Offices are seeking to complete direct deals. Sovereign Wealth Funds are also returning to the United States, among other markets. Investors such as Singapore's GIC have recently led or co-led deals, and the Qatar Investment Authority was, early in 2019, reported to be increasing its United States exposure to approximately $45 Billion USD over the next two years.
However, Private Equity remains an attractive option for sellers wishing to roll over some of their equity to benefit from upside, as well as those not wishing to divulge commercially sensitive information to competitors.
Increased competition for deals has had an inevitable impact on valuations. EBITDA multiples in the United States reached an average of 12.9x in September 2019, compared with 11.5x in December 2018, according to PwC figures. Many larger sponsors have tried to mitigate high entry prices by fishing for deals in the mid-market and pursuing buy and build strategies. This strategy should endure, as it enables Private Equity Backed Companies to benefit from synergies and therefore potentially pay more for assets. Yet competition has become fierce in this part of the market too and multiples are also rising. Valuations of United States M&A deals in the $100 Million USD to $250 Million USD range have increased markedly: from an average of 9.0x for 2017 to 10.7x in the year to September 2019, according to Capital IQ.
PUBLIC - TO - ON THE RISE:
Rising private company multiples are making public company valuations more attractive for PE. As a result, the market has seen public-to-private transactions find favor once more with PE firms. Hellman & Friedman, for example, led the acquisition of publicly listed human capital software group Ultimate in May 2019 for $11 Billion USE. Meanwhile, drugstore group Walgreens Boots Alliance is reported to be in talks with Private Equity firms about a $70 Billion USD take-private in what would be the largest-ever buyout.