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Quarter-End Insights

Private Equity Outlook: Larger Funds, Larger Deals

As investors deploy large reserves of capital into a market with elevated prices, deal sizes have climbed to decade-highs.

  • U.S. private equity capital overhang has declined for the first time since 2012, signaling that private equity funds deployed more than they raised in 2016; however, the decrease can be almost entirely attributed to energy funds. If this trend were to continue, it could alleviate some of the competitive pressures that have pushed up buyout multiples.
  • Deal count has been trending down, but capital invested has held relatively consistent; both the median and average deal size in 2017 are at their highest level in the last decade. Larger deal sizes are likely to persist in the coming years, as the average fund size has more than doubled from 2010 to 2017, and bigger funds will inevitably need to execute larger deals.
  • Deal activity has undergone significant shifts at the sector level, with IT growing from 16% to 19% of deals, while business-to-consumer (B2C) has fallen to just 16%, down from its average level of 20% over the last decade. This shift away from B2C is unsurprising given the much-reported challenges facing the retail sector. Heightened activity in the software industry has been the main driver of IT’s expansion, as PE firms gravitate to software-as-a-service (SaaS) platforms and other IT business models that offer a reliable source of recurring revenue and predictable cash flows.
  • Exit activity continued its trend downward. Although some contraction in exit activity was to be expected after 2014–2016 registered as the best three-year stretch on record, exits should still be a focus for general partners (GPs) as 40% of currently PE-backed companies have been held for at least five years. As such, we expect exit activity to rebound through the end of 2017 and into 2018.