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The market is more competitive than ever, with The Financial Times warning: “It is an indication of the feverish conditions in private equity that buyout groups are not only setting new records for fundraising, they are also turning money away at their fastest ever rate.”
Total assets under management grew 9.6% from the end of December 2016 to reach a new record of $2.83t by June 2017. This was more than double the size of the industry at the end of 2006. “With dry powder levels approaching $1t and increased competition from direct investors, we are going to continue to see high valuations,” says Hugo Parson, EY UK & Ireland Global Head of Origination for Private Equity.
Direct investment by sovereign wealth funds and family offices also increases competition. This increases the pressure to find quality investment opportunities that will deliver acceptable rates of return. “The priority for GPs is putting a record amount of dry powder to work, regardless of competition,” states Parson.
We have witnessed an increase in the number of private equity “secondary” deals (and “tertiary,” and so on) as a percentage of large global PE deals. The complexity is increasing, requiring an ability to drill down from a sector level and through the subsectors to the specifics of each origination opportunity.
Secondary PE buy-outs as a percentage of total buy-outs increased by 75% from 2008 to 2017 (Source: Dealogic. Deals with EVs US$100m and above).
Corporate acquirers with M&A-driven growth agendas also are competing for the most attractive assets. They are increasingly active due to robust balance sheets and are actively seeking more efficient use of cash balances, strong leverage markets and historically high share prices.
Technological disruption, combined with companies’ greater skill in extracting deal synergies, means corporates are prepared to pay higher multiples for premium assets than they would have been in the past, thus enabling them to outbid private equity houses in auction processes.
Consumer goods giant Unilever is a case in point. According to The Financial Times: “The mergers and acquisitions department of the Anglo-Dutch company that produces Dove soap and Magnum ice cream has been so busy in the past three years that if it wanted to give away samples from all these deals, it would need suitcases to stuff them in.” Acquisitions have included specialist skin care firm Sundial Brands, while divestments include the old staple Flora and Stork.
In this environment, private equity houses must identify opportunities where they have a strong transaction edge — both homing in on corporates’ disposals and competing for them in acquisitions — before the broad market picks up on these opportunities.