How the Private Equity Industry Is Changing

Nicholas J Price
5 min read
Fluctuating markets continue to create notable changes within the private equity industry. Exit and deal making activities were depressed early in 2019 as a result. Investors gained a slight bit of confidence as leveraged lending and public markets saw an uptick. Later in the year, deal making started to recover and match the pace of 2018. Investors and analysts still have big concerns over geopolitical activity and economic performance. Private equity exit activity remained low for the entire year and continues to trend below historical norms. In 2019, there were a few major fundraising transactions and overall fundraising funds climbed higher.

IT, Healthcare and B2B Continue to Be Front-Runners

In the first half of 2019, IT, healthcare and B2B combined to make up 63% of the total private equity deal values in the United States. These industries make up an even higher percentage of deal count. Their average deal size increased by 50% for technology and 10% for healthcare.

Investments in the energy industry waned in 2019. The third quarter showed the lowest number of deals in a single quarter since 2010. In addition to deal volumes continuing to be low, the average deal size also dipped to $13.7 million in the third quarter of 2019 compared to $30.3 million during the same quarter of 2018.

The IT, healthcare and B2B industries also make up a high percentage of deal count. It's difficult to predict whether these trends will continue. It's possible that as markets continue to make fewer deals, capital will find its way to the most proven and popular industries.

General Partner Stakes Picked Up in 2019

The market continues to prove itself with high cash-on-cash profits. As a result, investing and fundraising in general partner stakes have begun to pick up. Limited partners will likely continue to look for ways to increase the exposure to private equity investments besides offering up capital to general buyout funds. Venture firms are starting to receive some of the capital that gets raised through this strategy, although more of the capital is ending up with late-stage firms or buyout firms that garner larger, more regular, amounts of assets under management on which they can charge management fees.

Exit Activity Reached Historical Low Levels

Private exit activity is at a historical low level. By the second quarter of 2019, private equity exit activity was $62 billion over 168 exits and that was only slightly under the first-quarter figures.

More Private Equity Deals Got Bigger in 2019

In past years, most of the deals under $25 million have typically made up a great share of the deal count in U.S. private equity. The number of these deals has decreased as larger deals have increased in number.

Larger Funds Closed Deals in 2019

United States private equity funds continued to capture huge amounts of capital even though it dropped a bit compared with the first quarter of 2019. Blackstone helped to surpass 2018's final figures when they closed a record $25 billion mega-fund before the end of the year. Financial services remain a hot sector in an active market.

In 2019, enterprise values and EBITDA multiples rose slowly. The size of buyout growth also increased within the last year. Overall, general partners made larger deals and pushed up the median size of all deals.

Mega-Funds Performed Well in North America and Europe

In 2019, private equity mega-funds consistently performed at or near the top compared with smaller funds in both North America and Europe. Between 2009 and 2013, mega-funds outperformed smaller funds substantially. Experts believe that this activity may be due to the run-up in equity markets over the last 10 years.

Mega-funds are typically larger and more comparable to publicly listed companies, which means they can more aggressively bring portfolio companies to market. This may create negative consequences in down markets. In the past, smaller companies have outperformed due to the size of the premium in public markets. The same has not been true for businesses backed by private equity. Private equity mega-funds are proving to have superior performance and they have a tighter performance distribution band on the internal rate of return.

Fundraising Activity Is Heightened

In 2019, fundraising general partners raised $714 billion from investors, which is the third-largest amount ever. This brings the total amount to $3.7 trillion since 2014.

The upswing in fundraising activity is being driven by limited partners who desire to allocate to general partners who use strategies that have traditionally performed better than public markets. In addition, general partners face an urgency to raise funds before we see a potential cyclical economic downturn. Private market allocation is becoming an integral part of most institutional portfolios. As a result, more limited partners are raising allocations to private equity firms or investing in the asset class outright.

Blackstone (BCP) is the largest alternative investment firm in the world and it closed on Blackstone Capital Partners VII in a $26 billion buyout. It was the largest buyout since Apollo Global Management raised $25.7 billion in 2017. While BCP didn't have a set fundraising goal, it held its first close at $22 billion in June 2019. CalPERS committed $750 million, which was an increase of 25.9% and the Washington State Investment Board also committed $750 million, which was an increase of 33.3%. These funds came from the amounts that the two limited partners had allocated to Blackstone's 2016 vintage buyout fund. This is an example of how allocations rise to alternatives in some of the country's largest pension funds.

For the foreseeable future, private equity will continue to undergo a period of change. The right data room can make a very big difference in how smoothly you can conduct your transactions. Diligent's virtual data rooms allow you to control all your documents in one secure location, which puts everyone's mind at ease. Choose Diligent Corporation for your virtual data room needs for mergers and acquisitions, private equity and more.