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Private Equity: Early Signs Look Promising

The private equity market got off to a roaring start in the first quarter of 2017, with new commitments up sharply compared to last year.

(Estimated reading time: 2 min 42 sec)

Here are some highlights from Callan’s Spring Private Markets Trends newsletter:

Fundraising

  • New private equity partnership commitments totaled $80.0 billion, with 310 new partnerships formed, according to Private Equity Analyst, a substantial boost from $53.1 billion and 177 in the first quarter of 2016.
  • Ten funds raised more than $1 billion, up from only four a year ago, according to Buyouts.

Given that new private equity partnership commitments jumped 51% from the first quarter of 2016, I would not be surprised if the figure again tops the $300 billion mark this year, potentially exceeding 2016’s total of $312.2 billion. And both buyout and venture capital (VC)-backed IPOs raised more money than in the previous quarter.

Buyouts

  • Buyout funds invested $35.0 billion in 379 companies, a nice bump compared to $28.3 billion and 322 in the prior quarter.
  • Buyout M&A exits fell steeply to just 117, the lowest exit count since the third quarter of 2013 and down 25% from the prior quarter’s 157. Announced values also dropped sharply: 30 deals totaling $14.4 billion, off 47% from $27.0 billion in the fourth quarter.
  • Three buyout-backed IPOs raised a total of $2.4 billion, compared to three in the prior quarter, raising $1.97 billion.

Venture Capital

  • New investments in VC companies totaled 1,808 rounds with $16.5 billion of announced value, according to the National Venture Capital Association (NVCA), compared to 1,898 and $14.3 billion in the fourth quarter.
  • Venture-backed M&A exits totaled 132 and disclosed value hit $10.4 billion, compared to 162 and $6.8 billion in the fourth quarter.
  • Seven VC-backed companies went public with a combined float of $4.0 billion, compared to seven and $684 million in the fourth quarter. The largest was photo and video messaging company Snap, which raised $3.4 billion.

Allocations to VC funds hit their lowest level since 2015. VC deployment is down from recent peaks exceeding $20 billion and around 2,600 rounds per quarter, although the investment rate is still quite elevated by historical standards. The NVCA predicts this moderate pace will continue in the near term.

Returns

  • The Thomson Reuters/Cambridge database’s fourth-quarter 2016 All Private Equity Index return was 2.19%, compared to the S&P 500 Index (3.82%) and the Russell 3000 Index (4.21%).

Private equity has typically outperformed public equities: 4.2 percentage points annually compared to the Russell 3000 Index over the 15-year period ended December 31, 2016. But the gap is -1.5 percentage points over the 5-year period ended December 31, 2016, because of the recent surge in public equities. I expect that as public equities inevitably stumble, private equity will again outperform.

Additional observations:

  • Buyout prices remained high and general partners focused on add-on investments, which comprised 67% of the quarter’s total deal count. Bain & Co. reported recent prices averaging 10.9x earnings before interest, taxes, depreciation, and amortization (EBITDA) compared with single-digit multiples as recently as 2015.
  • Although public equity markets are marching upward, the IPO window is open a mere crack compared to the span from the first quarter of 2012 to the third quarter of 2015, when buyout-backed IPOs averaged 12 per quarter.

Read the full newsletter for more information about the latest results from the private markets and additional analysis.