In the US private equity industry, it sometimes feels like a new firm sets a fundraising record every week. It makes for a nice headline, sure, but the current capital raising frenzy also makes dealmaking more challenging as valuations rise, causing firms to either pony up additional capital to lock down a deal or look outside the US.
There are plenty of reasons as to why the US private equity sector experienced a dip in dealmaking and exits through the first three months of 2018. Luckily PitchBook had the 1Q 2018 US PE breakdown and 1Q US PE Middle Market report that outlined precisely how the deal, exit and fundraising environment shaped the industry.
Both reports are available to download in full, but here are nine key charts that help sum up the first three months of 2018 in PE: Deal activity and deal value declined in 1Q, but don't worry just yet Yes, the chart doesn't look especially promising. But the figures don't include 2Q, which has experienced a bevy of mega-buyouts that evoke memories of the massive PE deals struck before the 2008 recession. In the last few weeks alone, for instance, KKR has struck agreements to buy Envision Healthcare for an enterprise value of nearly $10 billion and separately agreed to purchase BMC Software in an $8.3 billion deal that marked the largest PE-backed software buyout since the recession.
Meanwhile, the buy-and-build model isn't going anywhere Buying a group of similar companies, merging them, then selling them off in a few years is one of the most common ways for private equity firms to make a nice return on an initial investment. And that strategy appears to only be increasing in popularity. Almost one-third of of PE-backed businesses complete at least one add-on deal at some point during a PE firm's ownership tenure.
B2B still makes up a majority of deal flow Private equity activity in the B2B sector has remained consistently strong since 2010, and it's picked up even move over the past three years. If early data is an indicator, that doesn't figure to change.
PE-backed exits are down, too After an impressive run to close last year, PE-backed exits took a dive in 1Q. But there were reasons to be optimistic, too. Despite volatile public markets, there were 12 PE-backed IPOs in 1Q despite volatile public markets, the third-highest mark over the past two years.
Fundraising is taking slightly longer but still moving fast It was going to be basically impossible to surpass the historic PE fundraising that took place in 2017, but GPs are still raising buyout funds quickly—even if it's taking a few months longer on average than it used to.
Buyout fund size and all PE fund size has dropped slightly Total PE fundraising in the US dropped almost 37% in 1Q, but the median size of funds still remains fairly large, as LPs looked to allocate more capital to fewer managers, perhaps to avoid those pesky management fees.
Firms raise more capital across fewer funds As I said, there's plenty of money coming in. It's just a matter of how much LPs can trust first-time fund managers that typically don't raise funds that rival even the established middle-market investors. According to this chart, it appears that more LPs are going with the established players more often.
Middle-market funds account for most of capital raised That said, the US PE middle-market is still booming, especially when it comes to fundraising. The percentage of PE funds raised by middle-market investors jumped some 56% in 1Q. Not bad. Not bad at all.
IT & healthcare exits dominate the middle market The healthcare industry is ripe for consolidation, which means lots of middle-market PE firms are taking the chance to cash out (as well as invest). Meanwhile, firms seem to be cashing in more on the tech investment craze that first gripped the VC world than they have in recent years.
Related read: The state of the US venture industry in 15 charts