Technology continues to be a key driver behind the momentum, and the outlook for continued activity in the sector remains strong. Our analysis suggests that PE firms are gravitating toward software firms that are experiencing sharp inclines in top-line growth backed by sustainable recurring revenue models, particularly in the software-as-a-service (SaaS) space. Other active sectors in 2018 include financials (the result of increased activity in insurance); health care (driven by consolidation opportunities, demographic trends and the development of new drugs and devices); and consumer products (particularly the food and non-alcoholic beverages segments).
While fundraising and acquisitions remain active, exit activity continues its secular downward trend, with 762 deals announced so far this year valued at US$261b, down 6% from a year ago. One exception was the Asia-Pacific region, which saw a notable upswing, with PE exits by M&A value up 64% from last year — welcome news for LPs invested in the region.
Not just buyouts — activity is robust across the private capital space
PE firms continue to diversify their offerings to investors and deploy a wider range of private capital vehicles. Offerings in the infrastructure and the credit spaces have seen particularly elevated levels of interest.
In infrastructure, fundraising for new vehicles has already set a new record for commitments gathered in a single year. To date in 2018, LPs have funded 51 vehicles totaling US$81b in commitments, surpassing the US$77b that was raised in all of 2017. We expect continued strength; LPs remain attracted to infrastructure’s unique potential for deploying large amounts of capital for long periods of time and limited reinvestment risk relative to many other asset classes. A recent survey from Preqin found that 43% of LPs surveyed expected to increase their allocations to infrastructure over the next year — this was more than 10 percentage points higher than the next closest asset class.
Similarly, funding for private credit strategies is also active. Through the end of the third quarter, funds have raised more than US$87b for credit strategies, up 18% from the same period a year ago. As a result, firms now have nearly US$282b in capital available for deals, up 14% from just nine months ago.
Direct lending strategies, which last year saw fundraising more than double 2016, have continued to grow in 2018, albeit at a moderated pace. Such funds have raised US$35.7b so far this year, up 8% from the same period a year ago. Mezzanine funds, by contrast, have seen significant year-over-year growth, bringing in US$22.5b, up from US$9.7b last year.