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INVESTMENT-TO-EXIT RATIO HITS 1.7X, LOWESTIN A DECADEPAGE 12»
F UNDR AISING T R AIL S T IL L OPEN: MEDIAN F UND SIZE UP WHIL E T IME T O CL OSE
KEEPS FAL L INGPAGE 15»
L E AGUE TABL E SPAGE 17»
I N P A R T N E R S H I P W I T H
US
3Q 20 15
C O - S P O N S O R E D B Y
REGIONAL BRE AKDOWNPAGE 10»
CONTENTSIntroduction
Overview
Deal Multiples and Debt Levels
Investments by Deal Size
Investments by Industry
Investments by Region
Q&A: Murray Devine
Exits Overview
PE-Backed Sales
IPOs
Fundraising Overview
League Tables
4
5-6
7
8
9
10
11
12
13
14
15-16
17
CREDITS & CONTACTPitchBook Data, Inc.
JOHN GABBERT Founder, CEO
ADLEY BOWDEN Senior Director, Analysis
Content, Design, Editing & Data
ALEX LYKKEN Editor
ANDY WHITE Lead Data Analyst
DANIEL COOK Senior Data Analyst
GARRETT BLACK Senior Financial Writer
NIZAR TARHUNI Financial Writer
BRIAN LEE Analyst
JENNIFER SAM Senior Graphic Designer
JESS CHAIDEZ Graphic Designer
Contact PitchBookwww.pitchbook.com
RESEARCH
EDITORIAL
SALES
COPYRIGHT © 2015 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.
3 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
IntroductionPrivate equity deal flow in the U.S. is heading downward. The latest data reflects the
widespread perception in the industry that today’s high multiples will lead to stunted returns over the next five years. Investors have been willing to shoulder double-digit multiples over the past two years, justified by the need to spend money and the fact that PE as an asset class has become more specialized and focused after the crisis. While both justifications are valid, they mask the fact that their limited partners expect market-beating returns. In four or five years, firms will face an uphill battle in exiting their companies at substantially higher multiples than what they’re paying today.
There are exceptions. The middle and lower-middle-markets are healthy options for buyers seeking lower valuations, albeit at smaller check sizes. A number of niche industries are also ripe for investors that have become specialized and can take advantage of them: Healthcare service providers unreliant on government-subsidized reimbursements, niche professional service firms and “sticky” SaaS providers with high customer retention rates. By and large, those sub-sectors are seeing some of the highest valuations in their industries, but they’re
also seeing the most explosive growth rates, as well. Investors know they’re paying more for their deals, but they’re figuring out ways to make them successful and profitable. But for now, those investors are the exception to the rule.
The most telling statistic in this report, graphed on page 12, is the current investments-to-exits ratio. Through the first half, firms made only 1.7
investments for every one exit, the smallest proportion in over a decade. The lion’s share of those exits were made via strategic sales, which are on a torrid pace in terms of value. Taking advantage of the M&A boom, which has been a wet blanket for PE firms on the buy side, over $160 billion worth of strategic sales were made by PE sponsors in 1H. Last year’s
record of $166.7 billion exited should fall by the end of July. In fact, on a value basis, strategic sales may represent more exit value for PE firms by the end of the year than all exit value combined in 2014 ($264.4 billion).
We hope the information and data in this report are useful and help inform your decision-making process in the coming quarters. As always, if you have any questions, comments or suggestions, please contact us at [email protected].
Last year’s record of $167B exited
via strategic sales should fall by the
end of July.
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As the leading provider of VDR solutions, Merrill DataSite has empowered nearly 2 million unique visitors to perform electronic due diligence
on thousands of transactions totaling trillions of dollars in asset value. Learn more by visiting www.datasite.com today.
4 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
OverviewU.S. PE DEAL FLOW BY QUARTER
U.S. PE DEAL FLOW BY YEAR
U.S. PE deal flow continued its decline in 2Q on both
count and value bases. 726 transactions were completed for a combined $105 billion, both low points for the industry since early 2013. Through 1H, 1,509 deals have been finalized totaling $215.9 billion, which puts 2015 on pace to be the softest year for private equity since 2012. Investors are expected to continue facing a tough environment for the rest of the year, which makes a slowdown almost inevitable.
Blockbuster buyouts have all but disappeared, as strategics have become the only feasible buyers in this frothy environment. The public markets are inflated, and today’s stock prices have ambitious growth expectations priced
into them, presenting less opportunities for PE buyers to profit off of growing and struggling companies alike. Firms are also being stymied by competitive strategic acquirers, which can justify their higher bids because of synergistic opportunities and less reliance on financial engineering to achieve their ends. It’s not surprising, then, to see platform buyout activity continue its decline. Only 432 platform investments were done in 1H, including just 212 done in the second quarter. It’s unlikely that platform activity will recover in 2H 2015 as it did in 2H 2014, especially with expectations of the current M&A bonanza to continue through the rest of the year.
What is somewhat surprising
2015 is on pace to see deal flow levels
last seen between 2010 and 2012.
Source: PitchBook
Source: PitchBook
*As of 6/30/2015
$70
$78
$74
$132
$102
$101
$91
$114
$86
$94
$106
$181
$103
$111
$126
$173
$138
$137
$139
$134
$111
$105
593
533 537
745704 683
613
686 747697
670
1006
718
662
832 851933
820
907 912
783726
0
200
400
600
800
1000
1200
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2010 2011 2012 2013 2014 2015Capital Invested ($B) # of Deals Closed
$106
$408
$467
$513
$549
$216
2,686
3,120
3,063
3,572
1,509
0
500
1000
1500
2000
2500
3000
3500
4000
$0
$100
$200
$300
$400
$500
$600
2011 2012 2013 2014 2015*Capital Invested ($B) # of Deals Closed
5 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
is lower-than-expected add-on activity, which is falling by count even as it rises as a percentage of buyout activity. Add-ons have been trumpeted as a way for PE investors to circumnavigate high multiples and heated competition, as add-ons don’t attract many bidders and go for lower multiples. What’s more, we’ve heard several anecdotes of PE firms lining up acquisitive financing before approaching
platform targets, which should be helping buoy deal flow until multiples come down. In any case, the 334 add-ons done in 2Q were the fewest since late 2013 and well off the 398 made in 4Q 2014. It may be that a lowering tide is sinking all boats, including the small ones.Growth/minority transactions are also down. 2Q recorded 138 such deals, down 33% from 3Q 2014’s recent high (206). It’s also the softest quarterly count since 3Q 2012.
Market observers have been keeping a worried eye on PE activity. 2014 was a hallmark year for the asset class, with its 3,572 deals eclipsing 2007 levels, at least by count. But the more relevant statistic, total value, was a far cry from pre-crisis days. $548.7 billion of PE capital was invested last year versus $911.5 billion invested at its 2007 height.
INVESTMENTS BY DEAL TYPE
BUYOUTS: ADD-ONS VS. NON ADD-ONS
Source: PitchBook
Source: PitchBook
It may be that a lowering tide is sinking all boats, even small ones.
Unless a wave of large deals hits the pipeline, 2015 is likely to settle around the $400-$450 billion mark, which would put this year in line with 2010-2012 levels. The
data shows that investors are much pickier today than they were ten years ago, focusing more on specialization and being more cautious with their bets.
Overview
*As of 6/30/2015
*As of 6/30/2015
934
1,16
0
837
536 79
1
1,02
0
1,24
3
1,20
7
1,53
4
702
1,22
9
1,46
7
1,06
7
583
925 93
8 1,06
9
861
1,01
0
432
43% 44% 44%48% 46%
52% 54%58% 60% 62%
0%
10%
20%
30%
40%
50%
60%
70%
0
500
1,000
1,500
2,000
2,500
3,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*Add-on Non Add-on Add-On % of Buyout
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
*
PlatformCreation
PIPE
PE Growth
Recap
Add-on
Buyout
6 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
Deal Multiples & Debt LevelsMultiples and debt levels are cooling. Deals made through
1H were done at much lower valuation-to-EBITDA multiples compared to 2013 and 2014, down from 10x medians to 7.3x this year. Debt components are also shrinking, both on a debt/EBITDA basis and as a percentage of deal size. Investors included almost four and a half turns of debt in 1H deals, down from 6+ turns the prior two years. The median debt percentage fell below 60% in 1H for the first time since 2011, and was almost eight percentage points lower than the 2013 median of 66%.
These numbers are hard to track down and should be taken with a grain of salt, but they echo what we’ve heard in the market concerning deal multiples. There are reasons to believe PE multiples will stabilize or possibly ease in the near-term. Competition is already as strong as it’s ever been, especially from strategics. The number of buyers and sellers in the market is unlikely to get significantly more crowded, especially with an interest rate hike on the horizon. Valuations in the public markets should relax once that happens, which should have a similar effect on private market comparisons for PE targets.
After two years of 10x multiples, we may be seeing investors hit their breaking point on valuations. For ambitious firms willing to pay those multiples, they need to assume that their exit multiples will be materially higher after a 3-4 year holding period. Once it comes time to exit, PE firms may be dealing with a bear market, or at least a market not as forgiving on frothy valuations.
MEDIAN EBITDA MULTIPLES FOR BUYOUTS
MEDIAN DEBT PERCENTAGES FOR BUYOUTS
Source: PitchBook
Source: PitchBook
*As of 6/30/2015
*As of 6/30/2015
5.7x
5.4x
4.4x
3.8x 4.
6x
4.5x
4.4x
6.6x
6.0x
4.3x
3.38
x
3.12
x
2.91
x
3.76
x 3.55
x
3.72
x
2.94
x
3.36
x
4.0x
3.04
x
9.0x8.5x
7.3x 7.5x8.2x 8.2x
7.3x
10.0x 10.0x
7.3x
0x
2x
4x
6x
8x
10x
12x
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*Debt / EBITDA Equity / EBITDA Valuation / EBITDA
62.6% 63.4%
60.3%
50.0%
56.6%
54.5%
60.0%
66.3%
60.0%
58.5%
40%
45%
50%
55%
60%
65%
70%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
After two years of 10x medians, we may be seeing private equity hitting its breaking point on multiples.
7 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
DEAL COUNT BY DEAL SIZE
CAPITAL INVESTED ($) BY DEAL SIZE
Investment by Deal Size
Source: PitchBook
Source: PitchBook
Investors are shunning frothy markets when value can be found elsewhere.
The dominance of the middle market, especially its
lower reaches, is the main trend that stands out when analyzing investments by size. The gradual increase in the proportion of deals in the sub-$25 million range—about 48% of all 1H 2015 activity—should also be taken into account. Especially in response to sustained high multiples, the shift downward is obvious. Investors feel little need to surf a market awash in froth for as long as possible if valuable margins can be found elsewhere. Substantial add-on activity, even if slackened compared to prior quarters, is a driver of that lower-end investment. Sub-$25 million transactions exceeded 3% of total deal value in 1H 2015 for the first time in years, speaking to increased activity within that range, and perhaps hinting at more competition as a result. The vast majority of capital invested in 1H 2015 was still within the core and upper middle markets, in part thanks to their categorical breadth but also testifying to how the heated market has shifted PE investment dynamics. There’s been an uptick in activity further down-market, to be sure, but it’s difficult to eke out meaningful returns within that realm alone, hence the cautious yet stable activity at higher levels.
There continues to be a gradual recentering of the entire span of PE investment around the core of the middle market. Yet even there, investors are easing off the acceleration, proof of just how difficult dealmaking is nowadays. *As of 6/30/2015
*As of 6/30/2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
*
$2.5B+
$1B-$2.5B
$500M-$1B
$100M-$500M
$25M-$100M
Under $25M
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
*$2.5B+
$1B-$2.5B
$500M-$1B
$100M-$500M
$25M-$250M
Under $25M
8 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
Investment by IndustryDEAL COUNT BY INDUSTRY
CAPITAL INVESTED ($) BY INDUSTRY
Source: PitchBook
Source: PitchBook
With caution abounding, B2B’s popularity only
continued through the second quarter of 2015 as PE investors sought refuge in the relatively stable U.S. business environment. The sector reached an even higher proportion of all U.S. PE investment than ever before in 1H, a preponderant 39%. That percentage will likely decline as 2015 wends on, but it illustrates how even with U.S. consumer spending recovering PE firms are relying on business products and services for their bread and butter. If lower energy prices persist, they will play a key role in improving many businesses’ bottom lines, which could render them even more attractive targets to PE investors.
B2C activity slacked in H1; the lofty total of B2C capital invested was skewed by the mammoth Safeway and PetSmart deals. Perhaps B2C spending will pick up in 2H once consumer spending becomes a more stable factor, having priced in the effects of lower energy prices and a stronger dollar. PE firms will have to hone a niche focus to succeed. That may mean overall B2C investment won’t pick up noticeably anytime soon, and may actually decline.
Similarly, PE investment in energy may remain depressed until investors have a better sense of long-term pricing trends. Despite talk of PE firms moving into distressed asset plays, energy deals have slumped in the first half of the year, reflecting investor uncertainty more than anything else.
B2B remains popular as investors seek refuge in a relatively safe industry.
*As of 6/30/2015
*As of 6/30/2015
0
200
400
600
800
1,000
1,200
1,400
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*IT Healthcare B2C B2B
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
*B2B
B2C
Energy
FinancialServices
Healthcare
IT
Materials &Resources
9 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
Investments by Region
INVESTMENTS (#) BY REGION
Source: PitchBook
Source: PitchBook
The traditional hubs of PE investment did not shift
much between 1Q and 2Q, with the Mid-Atlantic and West Coast accounting for the most deal flow once again. Examining yearly numbers shows that the West Coast in particular has been the lodestar of PE attention in 2015. One of the primary takeaways from the West Coast’s continued strength is PE’s focus on the tech sector. There are plenty of reasons for that focus, especially the attractive recurring nature of many software businesses’ revenues.
*As of 6/30/2015
The map corresponds to the graph below, which shows relative private equity deal flow between eight U.S. regions.
LEGEND
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2011 2012 2013 2014 2015
West Coast
Southeast
South
Great Lakes
New England
Mountain
Midwest
Mid-Atlantic
10 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
Tom Kenny Senior Managing Director,
Murray Devine
Q: 1. Over the last few years the favorable debt markets and good earnings of PE portfolio companies have generated a strong market for dividend recapitalizations. During the first six months of 2015 has this trend continued?A: The market for dividend recaps has been quite strong over the past couple of years; this was particularly true in the second half of 2012 through 2014. However, we did observe a bit of a slowdown in recaps during the first six months of 2015, which we believe is due to the re-introduction of some uncertainty in the debt markets as leverage multiples topped levels last seen ahead of the debt crisis. Moreover, the environment was not as favorable as it had been in prior years given the significant number of companies that completed recaps during the 2012-to-2014 timeframe. Those companies need to now pay down debt and show an increase in EBITDA in order to start the recap cycle again. You’ll often also see external factors influencing dividend recap decisions, not unlike in 2010, when the potential lapsing of the Bush-era tax cuts drove investors to seek realizations or take profits where they could. To a certain extent, this played out again at the end of 2012, ahead of the January 1, 2013 “Fiscal Cliff” deal that ultimately did allow the capital gains and dividend tax cuts to lapse for certain filers, which produced a resulting slow-down in recaps in the months following the budget deal.
2. Have you seen an increase in boards of directors obtaining solvency and Delaware law capital adequacy opinions for recaps?Our sense is that most boards are generally viewing such opinions more favorably since they represent another layer of due diligence and help board members meet their fiduciary responsibilities. We also find that the legal community encourages boards to obtain an opinion for this reason. From our perspective, it’s difficult to quantify the extent to which boards have increased their dependency on solvency or capital adequacy opinions ahead of pursuing a recap, but given the number of lawsuits and the optics around dividend recaps in these situations, we do believe that boards have become more inclined to seek out a third-party opinion.
3. What impact have you seen on the continued high valuation levels in the market?The level of deal flow continues to be solid and we’d still very much categorize this as a seller’s market. Auctions, as might be expected, can drive valuations higher, but we’re seeing proprietary deals executed outside of a formal process in which valuations are reasonable when compared to public-market multiples. Given the high valuations, we’ve seen a number of sponsors pursuing an add-on strategy in which they buy a smaller asset and then seek multiple expansion by quickly building scale. We’ve also seen an increasing number of sellers seeking to get that “second bite” of the apple by selling a majority stake in a business and retaining a minority interest to keep open the possibility of realizing profits from future growth.
4. The Financial Accounting Standards Board issued an update to Business Combinations (Topic 805) Accounting for Identifiable Intangible Assets in a Business Combination in December 2014. This update provides a new accounting alternative for private companies when valuing intangible assets for a business combination. Have you seen PE sponsors adopting this for acquisitions in 2015?We’ve actually only seen a select few PE sponsors so far who have opted for this alternative treatment. Topic 805 allows acquired companies to not recognize intangible assets that would arise from a non-compete agreement, as well as customer-related assets that cannot be separately sold or licensed. These items would become part of goodwill. This alternative may be elected if the subject company has already or will elect the private company goodwill accounting alternative which requires goodwill to be amortized. The issue, which I believe speaks to the relatively muted adoption, is that if the acquired company ever becomes a public filer, the purchase accounting would have to be redone under the original guidance which would likely be both costly and time consuming.
Tom Kenny joined Murray Devine in 1989. He conducts and manages valuation engagements for financial reporting purposes. In addition, Tom performs solvency and fairness opinion analyses and provides expert testimony on valuation issues in litigation matters.
Formerly, Tom was Manager of Treasury Analysis for Campbell Soup Company where his responsibilities included capital markets, acquisition analysis, capital structure analysis, and risk management. Prior to Campbell Soup, he was a Senior Financial Analyst with a $1 billion hotel and gaming concern and also worked in public accounting.
Tom is a Certified Public Accountant (CPA) and Certified Management Accountant (CMA), and holds a Masters of Business Administration degree with a concentration in Finance from Temple University’s Fox School of Business. He is also Accredited in Business Valuation (ABV) by the American Institute of Certified Public Accountants, and has taught upper-level accounting and finance courses at Rowan University and Rutgers University.
Tom Kenny
11 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
Exits OverviewU.S. EXIT FLOW BY YEAR
U.S. INVESTMENTS TO EXITS RATIO
Source: PitchBook
Source: PitchBook
PE firms completed 228 exits in the U.S. in 2Q, worth
a staggering $119 billion. In fact, 2015 has already seen the worth of all PE-backed exits hit $185 billion, already 70% of the total value exited in 2014. To put that in a longer-term perspective, the $264 billion exited in 2014 shot no less than $54 billion past the previous decade high, the $210 billion recorded in 2012. The historic seller’s market last year has reached such a high-pitched crescendo that it will be intriguing to see how far 2015 numbers end up going. Regression to the mean is inevitable, but the pace of that regression is difficult to assess. Exit counts by quarter have slid down since a high of 317 in 4Q 2014, even if value remains lofty. Will that slide continue at a sedate pace, or accelerate? That largely depends on how much longer corporate appetite for PE-backed holdings remains this fevered. Strategic buyers doled out $103 billion for PE portfolio companies in 2Q alone, dwarfing any other quarterly numbers going back to 2007. That speaks to how attractive PE holdings are to M&A-hungry corporates hunting for acquisitive growth in an environment where organic expansion is hard to come by, but how much longer can such rates persist? Prices are already quite high. Looking at exit counts by size shows just how much PE firms have benefited from U.S. corporate cash hoards and sustained high stock prices fueling the M&A shopping spree: Over 35% of all exits in 1H 2015 were worth $500 million or more. A cluster of blockbuster sales—especially among healthcare and biopharma—led to exits worth $2.5 billion or more accounting for close to 60% of all capital exited in the first half of 2015.
*As of6/30/2015
*As of 6/30/2015
$140
$182
$95
$96
$134
$147
$210
$200
$264
$185
598
718
487
307
627
718
959880
1,072
478
0
200
400
600
800
1000
1200
$0
$50
$100
$150
$200
$250
$300
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*Capital Exited ($B) # of Exits
3.1x
3.1x
3.6x
3.7x
2.6x
2.3x
2.x
2.1x
1.9x
1.7x
.0x
.5x
1.x
1.5x
2.x
2.5x
3.x
3.5x
4.x
0
500
1000
1500
2000
2500
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
*
Investments/Exits # of Investments (excl. add-ons) # of Exits
It will be interesting to see how far this seller’s market can go once 2015 is in the books.
12 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
PE-Backed SalesSECONDARY BUYOUTS BY YEAR
Source: PitchBook
In a time of heightened competition for quality assets
and a graying portfolio, PE firms are looking to their fellow sponsors for investment opportunities at a frequent pace. 196 secondary buyouts were completed in 1H 2015 for a total value of $19.9 billion, with the median exit size hitting a massive $405 million. That $405 million was skewed, as many of the SBOs were in the upper middle market and beyond. With debt remaining fairly cheap and buyers being chiefly flagship brands like KKR, Bain and Apollo, it’s easy to see why those lofty prices were easier to stomach from the buy side, yet in a more interesting trend, some of these large SBOs were of companies that hadn’t been held for very long. Blue Coat Systems, for example, was bought in 2012 by Thoma Bravo and sold to Bain Capital in May. While these deals shouldn’t be over-interpreted as signifying the difficulty of current dealmaking, they may well reflect how difficult it is currently to find quality transactions in the upper ends of the market. PE investors willing and able to make big deals are taking advantage of the still-lenient lending climate while they can.
Corporate acquisitions have been the overwhelmingly dominant preferred exit rout in 2015, with 265 strategic sales completed year-to-date worth over $160 billion. Accounting for 55% of all 1H 2015 PE-backed exits, the exit ramp will almost certainly set a record by year end in terms of total deal value, as the record value of full-year 2014 deals totaled $166.7 billion, just $7 billion more than what 1H 2015 just produced. As we potentially begin nearing the end of the expansion phase of the U.S. business cycle, strategics are looking to M&A to find new segments and synergies that
CORPORATE ACQUISITIONS BY YEAR
Source: PitchBook
*As of 6/30/2015
*As of 6/30/2015
$84
$84
$66
$83
$94
$106
$120
$114
$167
$160
300
379
297
195
353
415
539486
578
265
0
100
200
300
400
500
600
700
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*Capital Exited ($B) # of Exits
$34
$83
$25
$31
$24
$81
$60
$73
$20
231
280
176
84
229
268
379
330
423
196
0
50
100
150
200
250
300
350
400
450
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*Capital Exited ($B) # of Exits
support their core businesses. Thus, portfolio companies purchased by PE just after the recession are reaching ages in their PE cycles ripe for acquisition. From PE’s perspective, the lull or arguable
reluctance to turn to public markets to flip companies, narrows firms’ exit options and could possibly funnel more exits to strategics flush with cash.
13 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
IPOsU.S. PE-BACKED IPOS BY YEAR
Source: PitchBook
1H 2015 continued to lose momentum in terms of IPO
counts and total capital raised. An anemic 17 completed PE-backed IPOs were done in the first half, a 56% decline year-over-year. In terms of capital exited, 1H 2015 PE-backed IPOs generated just $4.98 billion in proceeds, a 70% YoY decline. PE-backed public debuts have accounted for just 4% of all overall PE exits in the first half of the year, compared to 8% in the same period last year.
Year-to-date, U.S. public markets have moved fairly sideways, and while we can attempt to pick apart the recent uncertainties in foreign markets weighing down U.S. equities, the reality is, that may be irrelevant. With U.S. stock prices at such high levels, any uncertainty is enough to cause market participants to be more prudent and sell. Moreover, market drops have been accompanied by flights to safety away from equity and into fixed income securities, pushing interest rates right back down. These moving pieces create turmoil for PE funds looking to gauge the level of acceptance their portfolio companies will receive in today’s market, and thus, we’ve seen that notion show up in the numbers, as PE-backed IPOs have continued a notable decline that is likely to continue.
All that being said, it is worth noting that the IPOs done in 1H were done at historically high amounts. The median 1H IPO reached $225 million through June, one of the higher medians dating back ten years.
MEDIAN IPO SIZE ($M)
Source: PitchBook
PE managers are seeing turmoil in the public markets and showing hesitation with current conditions.
*As of 6/30/2015
*As of 6/30/2015
$0
$50
$100
$150
$200
$250
$300
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
$22
$15
$4 $8 $9 $17
$10
$26
$24
$5
67
59
14
28
45
3541
64
71
17
0
10
20
30
40
50
60
70
80
$0
$5
$10
$15
$20
$25
$30
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*Capital Exited ($B) # of IPOs
14 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
Fundraising OverviewU.S. PE FUNDRAISING BY QUARTER
Source: PitchBook
Private equity fundraising had a modest first half. 2015 is off the
pace set in 2013 and 2014, the latter two years having recorded at least $200 billion of capital raised each. $75.6 billion was raised through 1H 2015, which included only $16.8 billion raised in the largest fund bucket of $5B+. Last year’s mega-funds tallied $59.1 billion; 2013’s total was $100.8 billion. The dearth of $5B+ fund closes thus far helps explain the overall slowdown. By count, however, the fundraising trail remained busy, with 135 vehicles wrapping up through the end of June. That compares favorably to last year’s 307, the high mark since the crisis. We expect to see healthy fund count totals once the year is through.
As for fund sizes, PE seems to have a new sweet spot. 53% of total 1H capital raised went to the $1B-$5B range, the third time since the crisis that range received a majority of LP dollars. The notable exception is 2013, when $5B+ funds made something of a comeback—mostly because large blue-chip firms hadn’t been able to raise their flagship funds until then. Over the last year and a half, $5B+ funds have commanded less than 30% of the market share for PE dollars versus 48% at its peak in 2008. Conversely, the $1B-$5B range brought in less than a third of the total haul in 2007 and 2008 before hitting its stride in 2011 at 62%. It’s not a coincidence that the U.S. middle market has picked up so much steam following that vintage.
“Bigger” has been historically better in PE. For years, bigger meant multi-billion dollar take-privates, which are looking more like fossilized Source: PitchBook
2015 got off to a modest start for fundraising, off the paces of 2013 and 2014.
U.S. PE FUNDRAISING (#) BY SIZE
*As of 6/30/2015
*As of 6/30/2015
$191
$294
$259
$128
$90
$110
$132
$222
$203
$76
291
344
301
175 181216
228
289307
135
0
50
100
150
200
250
300
350
400
$0
$50
$100
$150
$200
$250
$300
$350
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*Capital Raised ($B) # of Funds Closed
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
*$5B+
$1B-$5B
$500M-$1B
$250M-$500M
$100M-$250M
Under$100M
15 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
Fundraising Overview
AVERAGE TIME TO CLOSE (MONTHS)
Source: PitchBook
Source: PitchBook
remains by the day. But LPs have always clamored to get into $1B+ funds, since their IRRs typically outpace smaller funds by at least 300 basis points. Those $1B-$5B fund managers are also benefitting from LPs rapidly consolidating their PE portfolios. The larger the fund, the larger the commitment —and a higher likelihood we’ll see the $1B-$5B range be a popular destination for the foreseeable future.
The two graphs to the right illustrate LP appetite for private equity. The median U.S. PE fund size continues to grow, to $230 million across all fund types as of 1H. Simultaneously, fundraising efforts are taking less time to complete than they have over the past five years. On average, the PE funds that closed in 1H took only 10.7 months to do so, about half the time compared to the aftermath of the crisis in 2010 (20.1 months). In other words, PE firms have spent less time on the fundraising trail and raising more capital while they are. That said, the time-to-close aspect will not be as strong as it is today indefinitely, with once-reliable LPs trimming their PE portfolios and awarding mandates to fewer fund managers. For those firms that don’t make the cut, they’ll likely find a steeper climb on the trail than they do today.
For now, however, firms are reloading with relative ease. 87% of funds that closed in the first half hit or beat their fundraising targets; 89% of 2014 vintages can also claim that mark. Even at the height of the buyout boom in 2007, only 68% hit or beat their targets. Of course, that vintage was made up of much larger funds—$933 million on average versus $564 million today.
The median PE fund size continues to grow, even as funds are taking less time to close.
MEDIAN U.S. PE FUND SIZE
*As of 6/30/2015
*As of 6/30/2015
$0
$50
$100
$150
$200
$250
$300
$350
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*Buyout Funds All PE Funds
8
10
12
14
16
18
20
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*Buyout Funds All PE Funds
16 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
2Q 2015 PE Deal League Tables
ABRY Partners
GTCR Golder Rauner
Hellman & Friedman
Kohlberg Kravis Roberts
Ares Capital
Audax Group
The Carlyle Group
Warburg Pincus
Huron Capital Partners
Leonard Green & Partners
Oaktree Capital Management
PNC Erieview Capital
Summit Partners
The Riverside Company
TPG Capital
Vista Equity Partners
Cave Creek Capital Management
JZ Capital Partners
KRG Capital Partners
The Jordan Company
Wood Creek Capital Mgmt
21
11
11
11
8
7
7
7
6
6
6
6
6
6
6
6
5
5
5
5
5
INVE S T OR DE AL SGE Capital
Madison Capital Funding
Golub Capital
BMO Harris Bank
Ares Capital
PNC Financial Services Group
CIT Group
RBC Capital Markets
NXT Capital LLC
Abacus Finance Group
Goldman Sachs
NewStar Financial
Bank of America
J.P. Morgan
16
13
9
8
6
5
5
5
4
4
3
3
3
3
L ENDER DE AL S
Houlihan Lokey
William Blair & Company
Goldman Sachs
Moelis & Company
KPMG
Raymond James Financial
TM Capital
BB&T Capital Markets
Lazard Middle Market
Morgan Stanley
Robert W. Baird & Co.
Lincoln International
Lazard
Macquarie Capital
Deutsche Bank
Harris Williams & Co.
J.P. Morgan
PwC
RBC Capital Markets
UBS
19
14
11
9
7
6
6
5
5
5
5
4
4
4
4
4
4
4
4
4
ADVISOR DE AL S
Kirkland & Ellis
Latham & Watkins
DLA Piper
Jones Day
Weil, Gotshal & Manges
Goodwin Procter
Paul, Weiss
Paul Hastings
Willkie Farr & Gallagher
Ropes & Gray
Greenberg Traurig
Simpson Thacher & Bartlett
Sidley Austin
35
21
16
15
15
14
11
8
8
8
8
7
6
L AW F IRM DE AL SSource: PitchBook
Source: PitchBook
Source: PitchBookSource: PitchBook
17 PITCHBOOK 3Q 2015
U.S . PE BREAKDOWN
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