What’s In Store For Private Equity In 2017

What’s In Store For Private Equity In 2017

What do your peers and competitors in private equity think will happen next year? Based on PitchBook data, where does the industry stand as we head into the new year?

Our analyst team has drawn from surveys of PE professionals and PitchBook datasets to produce the 2017 PE Crystal Ball Report, which is sponsored by Donnelley Financial Solutions. Packed with PE practitioners’ takes on issues ranging from the impact of rising interest rates to the fundraising landscape, the report also includes:


The consistent decline we saw in private equity deal flow this year was driven by a multitude of factors. PE-backed company inventory remains inflated, yet the proliferation of transactions over the last three to four years means that much of that inventory is new. Consequently, competition increases as both strategics and financial buyers are fighting over a lower volume of deals coming to market. The valuations we expected to subside in 2016 didn’t, and for some, justifying those multiples given the concerns about company quality and growth prospects we’ve previously noted made it difficult to pencil out deals. Adjustments were made including a consistent uptick in the equity portions managers kicked in to complete deals, yet the combination of less leverage and higher purchase prices we think culminates in a future return profile for the industry that is much lower than what we’ve grown accustomed to. Despite the declines we’ve already seen this year, we think 2017 will give us more of the same, underpinned primarily by an impressive fundraising year with managers sitting on a significant amount of recently raised capital they will look to deploy.

In this second edition of the Crystal Ball report series, we’ve combined both our own proprietary data with a survey we’ve put out to a wide group of PE investment professionals to help gauge 2017 industry sentiment. We hope the information in this report helps inform your decision-making process and as always, please contact us at [email protected] with any questions or comments.

Nizar Tarhuni

Senior Analyst

Respondent statistics

With over 100 respondents taking our Crystal Ball Survey this year, we were able to capture a fairly wide cross-section of the PE market. The typical respondent, however, pursues a buyout or growth strategy, could  pecialize in any number of industries or none at all, and is based in the US. The greatest number of respondents were in the middle market—28% said they manage between $1 billion and $5 billion.

private equity

Despite 85% of respondents having headquarters in the US, just 61% of responses indicated their firm will pursue most transactions in the US, suggesting significant cross-border activity. Besides the US, respondents report strategies targeting companies in Europe, Canada, Mexico, Central and South America, South Asia, and East Asia. Most of our survey respondents were fairly busy at the time of taking the survey in November and December of 2016, with 81% reporting that their firm was currently in the process of negotiating deals. Further, about 12% of respondents said their firm was currently negotiating more than 10 deals—though this is probably reflective of the 9% of respondents who reported AUM exceeding $5 billion.

Investment landscape

The last edition of PitchBook’s Crystal Ball report correctly predicted a decline in PE activity over the last year. Using data through mid-December, both PE deal volume and value have fallen by about 20% year over year. The value of PE exits is also down about 25%, while fundraising figures have fallen about 13%—a relative bright spot for the industry. 2016 has been marked by lofty purchase price multiples and competition from strategic acquirers who are ripe with cash and searching for external growth. Because of this, financial buyers are having to put up more equity in order complete deals at such high prices.

Moving into 2017, we expect deal flow to be more or less flat with 2016 levels. High transaction multiples and a lack of quality assets in the market will challenge dealmakers when it comes to sourcing, while high levels of dry powder and moderate expectations for economic growth—at least in the US—will keep them fairly active despite the aforementioned challenges.

survey respondents identified “the state of the economy” as the most important driver of PE deal flow in 2017, followed by “PE-backed portfolio companies coming to market” and “sector-specific trends.” It goes without saying that nobody can predict the future state of the economy with certainty. Additionally, equity markets do not always reflect the state of the economy as a whole. That said, if the recent rally in public equities continues, it will benefit PE investments by kickstarting IPO markets for PE-backed companies.

We’ve seen an uptick in the percentage of PE-backed sales that are secondary buyouts this year, particularly in the middle market, and our survey respondents expect this trend to continue into 2017. “Other PE-backed portfolio companies coming to market” was ranked on average as the second most important deal driver. PE-backed company inventory has been increasing in recent years, so the number of portfolio companies up for sale should provide opportunities for managers who are looking to deploy capital.

In addition to the larger economic outlook and prevalence of SBOs next year, there are a few sectors that we believe are ripe for consolidation. We expect the heightened pace of dealmaking in healthcare-related markets to continue, as potential policy changes collide with a blossoming healthtech industry. Whether you believe it’s for better or worse, the possibility of significant changes to the Affordable Care Act (ACA) will motivate a new wave of deals in that sector, just as the passing of the ACA boosted activity under the previous administration. Everything from insurance to biotech and pharmaceutical companies to SaaS firms who provide healthcare-related platforms could see their business environments altered. This view is supported by our survey respondents who mentioned healthcare more than any other sector when asked to elaborate on sector-specific deal drivers. Further, healthcare-focused funds like KKR’s new Health Care Strategic Growth Fund exemplify PE interest in the space.

Similar to healthcare, the IT sector has seen an increase in transaction value this year despite falling activity across the broader PE landscape. We expect to see strong numbers again in 2017, particularly as more VC-backed companies are raising late-stage rounds and staying private for longer. Traditional buyout investors will start to target more growth-oriented strategies and the line between PE and VC will become blurred. What’s more, the seemingly unstoppable tech industry will prove more immune to any sort of macroeconomic troubles than, say, the manufacturing or consumer discretionary segments of the market which are more linked to GDP.

When it comes to challenges facing PE dealmakers in the coming year, survey respondents ranked “High transaction multiples” and “lack of quality assets in the market” as the most important. These two themes have been well-covered in our own analysis this year, and we expect them to continue creating obstacles for PE firms. With the median US M&A transaction trading above 11.0x EBITDA through 3Q 2016, many deals simply don’t pencil out. PE groups are having to contribute more equity as a percentage of the total capital stack, which will put downward pressure on future returns. In addition, diligence processes are becoming lengthier and more expensive, as firms must be certain they can justify the multiples they are paying.

Lastly, the lack of quality assets in the market is due in part to the buyoutboom of the last few years, as the most  obvious targets have already been acquired. The problem is exacerbated by the aforementioned lofty transaction multiples. A deal that makes sense at 8.0x EBITDA may be unjustifiable at 11.0x EBITDA. Interestingly, political uncertainty was identified by survey respondents as one of the least important challenges to PE deal flow. That is, a new administration in the US, the ongoing Brexit proceedings, and various oustings of global political elites this year don’t seem to have as big of an effect on deals as is commonly believed.

Read the full report here.

Source : http://www.valuewalk.com/2016/12/whats-store-private-equity-2017/

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