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Global M&A volume in 2017 fell slightly lower as compared with 2016, finishing at US$3.15 trillion in deal value (representing a 3.2 per cent decrease from 2016), according to Mergermarket. Despite the modest decline, global volume remained strong overall in the context of the past decade, exceeding the $3 trillion barrier for the fourth consecutive year. Global cross-border M&A fell to a three-year low, ending the year at US$1.3 trillion, a 10 per cent decline compared with 2016, marking the slowest year since 2014 (Thomson Reuters). However, buyers were willing to pay more for targets in 2017, with buyers paying an average of 12.32x of a target’s EBITDA, compared to an average of only 11.1x in 2016 (Bloomberg). In 2017, global private equity buyouts fared better than overall M&A levels, reaching an annual aggregate deal value of US$346 billion (representing a 10.8 per cent increase from 2016) (according to data provided by Mergermarket). The number of private equity deals increased in 2017 to 2,539 buyouts globally, an approximately 7.4 per cent increase from 2016 (according to data provided by Mergermarket). On the sell side, private equity-backed exits increased with respect to both deal value and deal volume in 2017 to US$362 billion over 1,721 deals, compared with US$352 billion over 1,668 deals in 2016 (according to data provided by Mergermarket). Private equity capital fundraising increased in 2017, with total global fundraising values of US$453 billion, as compared with US$414 billion in 2016 (Preqin).

Americas

Announced M&A deal volume in 2017 in the Americas totalled approximately US$1.4 trillion, reflecting a decrease of approximately 39 per cent from 2016 levels (Bloomberg). Although M&A activity in the US was strong in 2017, deal value in the US declined relative to 2016, totalling US$1.3 trillion, a 15 per cent decrease from 2016, which marks the second consecutive year of decreases in overall value since the record highs of 2015 (Mergermarket). M&A activity in Latin America increased from 2016 levels by 3.6 per cent, reaching US$80 billion in 2017 (Mergermarket). In Latin America, inbound activity, while down 5.3 per cent in value compared with 2016, was responsible for 61.6 per cent of M&A in 2017, accounting for US$49.3 billion over 318 trans­actions (Mergermarket). US private equity activity remained high overall in 2017 with respect to both the number of deals and aggregate transaction value. For US private equity bidders, total deal value for buyouts ended the year at approximately US$185.86 billion over 1,060 transactions, representing an increase of 33.71 per cent in deal value and an increase of 11.11 per cent with respect to the total number of deals (according to data provided by Mergermarket). In addition, private equity sponsors continued to focus their M&A activity on add-on acquisitions, which accounted for 37 per cent of all private equity-backed buyout deals in 2017 (Preqin). Notable add-on acquisitions in 2017 included Kohlberg Kravis Roberts & Co’s (KKR) acquisition of American Medical Response from Envision Healthcare Corp for US$2.4 billion, which KKR has stated it plans to combine with its existing portfolio company, Air Medical Group Holdings, and the acquisition of BKC Insurance Agency by The Hilb Group, a portfolio company of ABRY Partners, for an undisclosed amount. Notable completed private equity acquisitions in the Americas included the acquisition of Panera Bread for US$7.16 billion by BDT Capital Partners, who invested alongside JAB Holding Company; Sycamore Partner’s US$6.9 billion buyout of Staples, Inc; and the US$3.2 billion acquisition of Diversey Inc by Bain Capital LLC.

Europe, Middle East and Africa

Announced M&A deal volume in Europe, the Middle East and Africa (EMEA) totalled approximately US$969.4 billion in 2017, an increase of approximately 9.4 per cent from 2016 volume (Mergermarket). Europe accounted for approximately US$929.3 billion of total announced M&A deal volume, up 14 per cent from 2016 (Mergermarket). However, M&A volume involving the Middle East and Africa fell to US$59.4 billion, a 34.2 per cent decrease compared with 2016 volume (Mergermarket). In 2017, private equity deals in EMEA increased by 30.3 per cent compared with 2016, with deal volumes reaching their highest levels in the past decade (Bloomberg). On par with last year, there were 11 mega-deals announced, worth a combined US$254.2 billion (Mergermarket). European-targeted buy-side financial sponsor activity increased 34.34 per cent year-on-year to US$153.24 billion. Private equity sponsors achieved US$107.84 billion of exit activity for targets located in Europe, which represented a 4.47 per cent increase compared with 2016 levels. In the Middle East and Africa, inbound M&A volume decreased by 34.21 per cent from 2016 levels to US$59.43 billion, with US investments into the region worth US$25.63 billion over 51 deals (according to data provided by Mergermarket). Notable announced and completed European private equity transactions in 2017 included the announced €6.825 billion acquisition of Unilever’s margarine and spreads business by KKR; the acquisition of Alight Solutions from Aon Hewitt LLC by the Blackstone Group for US$4.8 billion; Hellman & Friedman’s US$5.2 billion acquisition of Nets A/S, Scandinavia’s largest payments processor; the approximately €4 billion acquisition of Visma led by HG Capital, which also included Cinven and Montagu; Lone Star Fund’s approximately €2.2 billion acquisition of Xella International; and the approximately US$2.3 billion acquisition of the Mauser Group by Stone Canyon Industries.

Asia–Pacific

Announced M&A deal volume in the Asia–Pacific region, excluding Japan, totalled approximately US$673.5 billion in 2017, which represented an increase of approximately 4.8 per cent from comparable deal volume in 2016, with the overall 2017 volume reaching its second highest point since 2001. Announced M&A deal volume in Japan totalled approximately US$40.1 billion, representing a decrease of approximately 36.4 per cent from 2016 levels (Mergermarket). Private equity activity in Asia–Pacific increased by 37.7 per cent in 2017 to $122.7 billion. China’s outbound activity was down to US$141.5 billion over 862 deals in 2017, a decrease of 6 per cent in volume and a decrease by 35 per cent in value from 2016 levels (Thomson Reuters). Asia–Pacific outbound acquisition deal volume also experienced a decline of 54.1 per cent as a consequence of China’s increased regulation of capital invested outside of its borders. Inbound activity in Asia–Pacific increased by 21.9 per cent to US$107.6 billion over 603 deals compared with US$88.3 billion over 585 deals in 2016. Private equity sponsor exits of targets located in the Asia–Pacific region totalled US$44.08 billion, which represented a decrease of approximately 7.41 per cent from 2016. In Japan, the value of private equity buyouts soared to US$16.06 billion, representing a 109.93 per cent increase compared with 2016. Private equity exits of targets located in Japan also saw a significant increase of 130.64 per cent above 2016 total deal value, with deals valued at an average of approximately US$3.99 billion in 2017 (all of the above data provided by Mergermarket). Notable private equity transactions in the Asia–Pacific region included the approximately US$18 billion acquisition of Toshiba Memory Corporation by a Bain Capital-led consortium that included Apple Inc, Dell Inc, Hoya Corporation, Kingston Technology Company Inc, Seagate Technology Holdings, SK Hynix and Toshiba Corporation; the US$6.8 billion acquisition of Belle International by a consortium of private equity buyers led by Hillhouse Capital and CDH Investments; and the announced S$16 billion acquisition of Global Logistic Properties Limited by a private equity consortium that includes Bank of China Group Investment, China Vanke Co Ltd, Hillhouse Capital Management, Hopu Investment Management and Schwartz-Mei Group Limited.

Debt-financing markets

In 2017, leveraged M&A loan volume saw a healthy increase of 15 per cent to US$311 billion from 2016 levels. Leveraged buyout loan volume as a percentage of overall M&A leveraged volume also saw an increase and was up 41 per cent compared with 32 per cent of overall M&A leveraged volume in 2016 (Thomson Reuters). One notable trend of 2017 was that lending in the middle-market increased to US$170 billion, a 23 per cent increase over 2016, which marked the highest middle-market lending has been in three years (Thomson Reuters). Median debt percentages for private equity buyouts and M&A in the US increased to 53 per cent of enterprise value in 2017, up from 50.5 per cent in 2016, while median enterprise value remained unchanged at 10.5x EBITDA for M&A transactions (including buyouts) in 2017 (Pitchbook). Debt to EBITDA multiples over the course of 2017 increased to 5.7x compared with 5.5x in 2016 (Pitchbook). Middle-market debt multiples are at a historic high entering 2018, with average total debt on structures with second liens or sub-debt increasing to 6.11x of EBITDA, up from 5.27x in 2016, and senior debt also increased to 4.5x of EBITDA, up from 3.9x in 2016 (Axios).

Portfolio company sales and IPOs

Portfolio company exits by private equity sponsors increased slightly during the past year. Global financial sponsors exited approximately US$362 billion of investments, which represented a 2.87 per cent increase from 2016 levels (according to data provided by Mergermarket). Strategic acquisitions remained the primary exit route, representing 54 per cent of all private equity-backed exit volume (Preqin). In 2016, the private equity market saw an increase in secondary buyout activity with a volume of US$65.2 billion, accounting for a 26 per cent share of global financial sponsor exit volume (Preqin). The US led total financial sponsor exits with US$185 billion over 1,097 transactions, a decrease of 16.67 per cent from US$222 billion over 1,238 transactions in 2016 (Pitchbook).

Notable completed portfolio company sales in 2017 included the €12.25 billion sale of Logicor by Blackstone to China Investment Corporation; the US$7.5 billion sale of AWAS Aviation Capital by Terra Firma and Canada Pension Plan Investment Board to Dubai Aerospace Enterprise; the €5.76 billion sale of Quironsalud by CVC Capital Partners to Fresenius SE; the US$5.5 billion sale of Capsugel by KKR to Lonza Group AG; and the US$4.6 billion sale of inVentiv Health by Advent International and Thomas H Lee Partners to INC Research Holdings, Inc (Pitchbook).

Globally, financial sponsor-backed IPOs and follow-on offerings accounted for 12 per cent of all exits in 2017 (Preqin). In the US, private equity-backed companies completed 45 IPOs in 2017, an increase from the 34 private equity-backed IPOs in 2016; however, the total completed IPOs for the past couple of years are still down from the previous peak of 75 private equity-backed IPOs that were completed in 2014 (Pitchbook). By the end of the year, total proceeds from such offerings in the US were approximately US$13.4 billion, an increase of 52.27 per cent from US$8.8 billion in 2016. The increase reflected a general increase in overall IPO markets, with overall IPO activity up 39.55 per cent from 2016. In 2017, there were approximately 374 IPOs with a deal size of at least US$100 million with a total value of approximately US$141.4 billion, up 39.55 per cent in activity and 33.02 per cent in value from 2016. The median dollar amount raised in 2017 was US$207.2 million, an increase of 11.46 per cent from US$185.9 million in 2016 (all of the above data provided by Renaissance Capital as of 15 December 2017). However, even though overall IPO activity increased in 2017, financial sponsor-backed IPOs saw a decline in terms of proportion of global IPOs, falling to 9.7 per cent, down from 13 per cent in 2016 (Ernst and Young Global).

Notable private equity portfolio company listings in 2017 included the listing of Invitation Homes Inc on the New York Stock Exchange raising approximately US$1.54 billion, a holding of Blackstone Group LP; the listing of Antero Midstream GP LP on the New York Stock Exchange raising approximately US$875 million, a holding of Warburg Pincus LLC and Trilantic Capital Management LP; and the listing of Gardner Denver Holdings, Inc on the New York Stock Exchange, which raised approximately US$826 million, a holding that included KKR (Renaissance Capital).

Strong year in private equity fundraising

Overall, 2017 was a record year for private equity fundraising, surpassing levels from recent years to reach an all-time fundraising record for the private equity industry. Fundraising by recognised, top-performing sponsors has remained strong and reflects continued consolidation within the private equity fundraising market in favour of such established sponsors with proven track records. Capital raised by private equity funds globally totalled approximately US$453 billion, up approximately 9 per cent from the US$414 billion raised globally in 2016 (all statistics herein provided by Preqin). Notably, private equity fundraising in 2017 was driven by the resurgence of mega-funds, as 28 per cent of the private equity capital raised in 2017 was raised by the 10 largest funds closed and 42 per cent was raised by the 20 largest funds closed.

Overall, conditions for private equity fundraising are at an all-time high, and competition among fund sponsors continues to increase. The number of private equity funds closed in 2017 dropped by approximately 26 per cent globally with the average size of today’s private equity funds increasing to a record of US$535 million. These trends reflect the continued consolidation in the private equity industry in favour of larger, established sponsors with proven track records as a result of institutional limited partners seeking to make larger commitments to fewer funds and consolidate manager relationships.

The continued strength of global fundraising has increased the amount of ‘dry powder’ accumulated over the past few years to record levels, reaching US$1 trillion by the end of 2017. Robust private equity-backed exit activity, at often record pricing, with distributions to investors reaching record levels in recent years (surpassing capital calls for the seventh successive year) provided an additional source of ongoing liquidity for investors and, coupled with the stability and outperformance of private equity relative to the public markets, has led many investors to seek to redeploy such amounts back into private equity by making new or additional commitments to private equity funds, further accelerating the growth in dry powder in 2017. Despite the record levels of capital available to invest, the increased market prices are a concern for fund managers as they face an increased challenge in deploying such excess capital, which is likely to cause fund managers to get more creative in their efforts to deploy capital.

It is expected that overall fundraising levels will remain strong in the near term and that the records, trends and developments witnessed in 2017 will continue. Larger institutional investors will continue to consolidate their relationships with fund managers and competition for limited partner capital among private equity funds will continue to increase, with alternative fundraising strategies (eg, customised separate accounts, co-investment structures, early-closer incentives, ‘umbrella’ funds, ‘anchor’ investments, ‘core’ funds and ‘complementary’ funds (ie, funds with strategies aimed at particular geographic regions or specific asset types)) playing a substantial role. As a result, established sponsors with proven track records should continue to enjoy a competitive advantage and first-time funds will need to cater to investors by either lowering fees, expanding co-investment allowances, focusing on niche investment opportunities or exploring other accommodative strategies. It is also expected that the SEC will continue to focus on transparency (eg, pre-commitment disclosure and consent from investors) with respect to conflicts of interest (including, among others, conflicts of interest arising out of the allocation of costs and expenses to funds and portfolio companies, the allocation of investment opportunities and co-investment opportunities and the receipt of other fees and compensation from funds, portfolio companies or service providers). Given this, larger private equity firms with the resources in place to absorb incremental compliance-related efforts and costs are likely to continue to enjoy a competitive advantage among their peers.

Outlook for 2018

Practitioners are optimistic that global M&A levels will increase in 2018 relative to overall 2017 levels owing to strong deal flow in the fourth quarter of 2017, which posted the highest quarterly volume for the year, including five mega-deals valued at over US$10 billion each in December alone. Some expectation of sustained M&A activity is in part the result of the significant amount of cash sitting on corporate balance sheets to be utilised in effecting acquisitions and investments. In addition, the passing of the Tax Cuts and Jobs Act in the US at the end of 2017 erased some of the uncertainty in the market regarding what new tax legislation might encompass. This should allow corporates and private equity sponsors to turn back to deal-making, while encompassing their analysis of the effects of the Tax Reform Bill into valuation models and strategic decision-making.

With respect to private equity investment activity, many commentators expect deal flow to remain healthy and roughly consistent with or slightly above 2017 levels. The current state of the global economy, certainty around the US Tax Reform Bill and high ‘dry powder’ levels are anticipated to be catalysts for increased deal activity. A continuing challenge for private equity firms in the US is finding attractive investment targets owing to the relative lack of supply of buyout-ready companies coming to market compared with previous periods, alongside pressure to deploy significant levels of committed capital (approximately US$1 trillion of dry powder globally at the end of 2017, according to Preqin). In response to sustained high valuations, some commentators predict that 2018 will also see sponsors continuing to explore new and creative methods of deploying capital, in addition to the prominent focus on add-on acquisitions, in order to harness ­synergies and find other ways to achieve returns on investment. Some methods might include minority investments, forming joint ventures, teaming up with strategic buyers or investing in debt, hybrid or other instruments at different levels of the capital stack.


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