US Private Equity Deal Sizes Skyrocket as a Result of Sustained Fundraising and Build Up of Dry Powder

Deal Flow on Pace for Another Strong Year with $263 Billion of PE Capital Invested in 1H 2018; Deal Sizes Trended Larger as a Result of Fund Size Step Ups, According to PitchBook's 2Q 2018 US PE Breakdown

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PitchBook

Jul 13, 2018, 09:00 ET

SEATTLE, NEW YORK, SAN FRANCISCO, and LONDON, July 13, 2018 /PRNewswire/ -- PitchBook, the premier data provider for the private and public equity markets, today released its 2Q 2018 US PE Breakdown Report, which found private equity (PE) activity remained strong in the first half of the year and is expected to see continued momentum for the remainder of 2018. Armed with ample dry powder from sustained fundraising, median deal sizes are already outpacing 2017 figures by 31%. The strong fundraising environment in recent years also helped boost the number of secondary buyouts (SBOs) that took place in the first half of the year, accounting for 52% of all exits – the highest levels on record. While the PE exit market experienced another year of declines in both exit count and size, activity is expected to pick up in the back half of the year due to improving IPO market and recent US tax reform.

"Strong fundraising in recent years, coupled with favorable economic factors have contributed to PE's strong investment momentum in 2018," said Dylan Cox, senior analyst at PitchBook. "Given PE's long-term outperformance of public equities, many LPs are increasing their target allocations for the asset class. On the deal making front, PE firms have become more likely to source investments from venture capital portfolios and less likely to source from the public markets."

Investment Activity

PE activity remained strong through the first half of the year with 2,247 completed deals totaling $263.9 billion, up 2% in volume and down 6% in value compared to 1H 2017. Key drivers of activity include easy access to credit and a buildup of dry powder due to sustained strength in fundraising.
PE deal sizes also trended much larger; the median deal size increased to $197.1 million in 1H 2018, representing a 31% increase over 2017's full-year figure. The step up in deal sizes were driven by larger fund sizes, which required fund managers to put larger amounts of capital to work. Ever-growing deal sizes have had a corresponding impact on deals under $25 million, which accounted for just 40% of deal flow in the first half of 2018, the lowest figure since 2007.
In a shift, PE investors increasingly targeted VC-backed companies (3.7% in 1H 2018) over publicly traded targets, which made up just 1.4% of total PE deals in the first half of 2018, down from a recent high of 2.9% in 2011. The trend is reflective of PE's growing interest in the software sector.

Exits

The number of PE exits is on pace to fall for the third straight year, totaling $84 billion in exit value across just 480 deals in 1H 2018. While exit counts continued to decline, exit sizes trended larger – the median PE exit value reached $231 million following the first half of the year which is a 15% increase over the prior year.
In the first half of 2018, SBOs accounted for over half of all exits, the highest figure on record. Strong fundraising and dry powder coupled with the need to pursue larger deal sizes can explain the uptick in SBOs.
While corporate acquisitions of PE-backed companies has fallen or remained flat in recent years, activity is expected to rebound in the second half of 2018 as a result of recent US tax legislation and strong balance sheets. PE firms are expected to have attractive exit options across the board in the second half of 2018.

Fundraising

PE fundraising got off to a slow start in the first half of 2018 in comparison to 2017, which saw prolific fundraising, but remains strong on a historical basis. Altogether 50 funds raised $32.1 billion in 2Q 2018 with funds between $1 billion and $5 billion accounting for nearly 60% of total capital raised, higher than any full year since 2011.
Many of the larger institutional investors have been increasing direct and co-investment allocation in an effort to reduce fees and take on more responsibility in-house, leading co-investments fundraising to hit its strongest levels to date, totaling 5% of capital raised.
In the first half of 2018, GPs closed funds at the quickest pace in a decade – the average time to close was just over 12 months, compared to 12.3 months throughout the same period last year. Increased competition amongst LPs to access fewer, top-performing funds drove the pace of fundraising. The data shows LPs committed near-record levels of capital in 1H 2018, assuming PE will continue to deliver its historic outperformance against other assets.

Additional coverage in this report includes:

Key takeaways
Overview
Deals by sector & size
PwC Q&A
Spotlight: Long-dated funds
Exits
Fundraising

Download the full report here.

About PitchBook
PitchBook is a financial data and software company that provides transparency into the capital markets to help professionals discover and execute opportunities with confidence and efficiency. PitchBook collects and analyzes detailed data on the entire venture capital, private equity and M&A landscape—including public and private companies, investors, funds, investments, exits and people. The company's data and analysis are available through the PitchBook Platform, industry news and in-depth reports. Founded in 2007, PitchBook has offices in Seattle, San Francisco, New York and London and serves more than 14,000 professionals around the world. In 2016, Morningstar acquired PitchBook, which now operates as an independent subsidiary.

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