Five trends boosting 2017 buyout activity to best value in a decade

Record fundraising and growing demand in key sectors helped private equity deal value soar in 2017

The accelerating rate of buyout activity has been a stand-out dealmaking trend in 2017, with deal value hitting a post-crisis peak. So far in 2017, the total value of US$372.1 billion in announced deals (from 2,213 buyouts) stands just 7.7 percent behind 2016’s total value with a quarter left to run.

We highlight the five key trends that have driven private equity deal activity so far this year.

1. Fundraising reaches record highs

Private equity managers are raising levels of cash not seen since pre-2008. According to Private Equity International, fundraising in the first half of the year reached US$264 billion, surpassing capital raised by funds in any first half of the year since the financial crisis. If the current pace holds, financial advisory firm Triago estimates that US$561 billion will be raised by PE funds globally throughout 2017.

Strong distributions, which according to Triago are forecast to reach US$380 billion in 2017, have fueled investor appetite for private equity exposure. For investors with a mature program, strong distributions in recent years have enhanced the need to re-invest and reduce their allocations. Private equity’s return profile relative to equities, bonds and fixed income has also boosted fundraising.

2. Foreign investors flock to Asia

Although outbound M&A from Asia’s largest market China has slowed due to government efforts to limit capital outflows, the value of cross-border buyouts into Asia hit US$33.8 billion in Q3—the highest quarterly value on record.

Asian private equity deals continue to offer strong growth dynamics, with favorable demographics and a growing middle class driving demand across sectors. As such, the Asian market offers a strategic means for investors to diversify portfolios away from traditional US and European markets.

US buyout firms drove this activity, investing in nine out of the top ten buyouts targeting Asian firms so far in 2017. The deal landscape was characterized by widely publicized, large-cap deals such as the US$10.6 billion agreement to purchase a majority stake in Toshiba Memory Corp. by a consortium led by Bain Capital, KKR’s US$1.1 billion plan to acquire a 48.3 percent stake in Japanese electronics company Hitachi Kokusai Electric, and Blackstone’s US$1.1 billion planned buyout of Singapore-based Croesus Retail Trust. 

3. Natural gas firms attract attention amid price downturn

A renewed dealmaking confidence within the energy, mining and utilities sector has translated into sizable deals. Private equity investment has increased steadily during the year to reach US$31.7 billion during the third quarter

Depressed natural gas prices have caused PE firms to pick up affected firms at an attractive price, as seen in the largest PE deal of the year targeting the sector: the US$17 billion planned buyout of natural gas firm Calpine Corp. by a consortium led by Energy Capital Partners. Blackstone is looking to follow a similar strategy, having announced its intention to buy the 700-mile Rover pipeline—the biggest natural gas pipeline under construction in the United States—from Energy Transfer Partners for US$1.6 billion. The New York firm has already invested an estimated US$7 billion in drilling fields, pipelines and a gas export terminal.

4. Healthcare dealmaking stages a recovery

Private equity investment in healthcare deals surged in 2017. A total of US$77.85 billion spent across 334 deals so far this year has already overtaken 2016’s total, signaling that healthcare PE could be on track to beat the previous record seen in 2006. The US$12.6 billion-worth of buyouts announced in Q3, although down compared to the previous quarter, almost doubles Q3 2016’s value of US$6.55 billion and marks the highest Q3 value since 2006.

Buyout firms have invested across the healthcare sector, seeking out deals ranging from pharmaceuticals and biotech to diagnostics and social care. David Porter, managing partner of Apposite Capital, says there has been an “explosion” of deals this year. A combination of factors such as an aging population, the rise in obesity and type 2 diabetes, and greater awareness around mental health have driven this growth in demand, he says. This phenomenon shows no signs of slowing down.

A common theme across all buyout-backed deals is seeking opportunities to meet rising demand and cut costs. ADIA and GIC’s US$9 billion agreement to acquire Pharmaceutical Product Development, a contract research provider to the pharma industry, along with the takeover of German generics manufacturer Stada by Bain Capital and Cinven, are examples of this trend.

5. Tech deal volumes soar to record highs

Global private equity investment in technology firms reached its highest deal volume on record so far in 2017, with 703 deals worth US$82.7 billion announced, up from 695 deals announced during the Q1-Q3 2016 period. “Private equity dry powder is at record levels, and the TMT sector is a natural area in which to deploy this capital, given its rapid growth and enormous return potential,” says Paul-Noël Guély, managing partner at Arma Partners.

PE activity has been prolific in the data and software-as-a-service subsectors, where software is licensed to customers, generating recurring, subscription-based revenues. In June, HgCapital led a group of investors in the largest-ever software buyout in Europe, with the US$5.4 billion acquisition of Nordic software group Visma.

Private equity firms have moved quickly to invest in new technology-driven companies that are disrupting and growing faster than traditional incumbents. Vista Equity Partners agreed to acquire Canadian lending and payment processor DH Corp. for US$3.4 billion in a bid to expand into the lucrative fintech space. Meanwhile GTCR is capitalizing on the burgeoning consumer trend for online shopping by purchasing online ticket seller Vivid Seats for an undisclosed sum. 

With technology firms providing opportunity for scale and efficient capital returns, the outlook for further private equity investment into the sector is bullish.

The strong long-term performance of private equity funds, coupled with the worldwide phenomenon of low interest rates, suggest fundraising is likely to maintain its current momentum. And with dry powder building up, there will be plenty of capital available to support ongoing deal activity.

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