Global M&A volume in 2018 saw a healthy increase as compared with 2017, finishing at US$3.52 trillion in deal value (representing a 11.1 per cent increase from 2017), according to Mergermarket. Global volume has continued to remain strong overall in the context of the past decade, exceeding the US$3 trillion barrier for the fifth consecutive year. Global buyout activity reached US$557 billion, its highest total in the past decade, up from US$537 billion in 2017, an increase of 3.7 per cent (Mergermarket). Global cross-border M&A deal activity fell by 6.6 per cent to 6,405 deals in 2018; however, deal valuations increased 6.4 per cent ending the year at US$1.35 trillion, up from US$1.27 trillion in 2017 (Mergermarket). The median EV/EBITDA multiple, for all deal sizes combined, increased in 2018 to 8.3x, up from 7.9x in 2017 (Mergermarket). However, for deal sizes US$250 million and greater, the EV/EBITDA multiple fell slightly to 11.2x, a decrease from the 12.2x multiple seen in 2017 (Mergermarket). In 2018, global private equity buyouts saw a significant increase from 2017 levels, reaching an annual aggregate deal value of US$425 billion, up 20.7 per cent from US$352 billion in 2017 (according to data provided by Mergermarket). The number of mega-deals (deals with a value greater than US$10 billion) increased to 36 in 2018, up from 30 in 2017 (Mergermarket). The number of private equity-backed buyout deals increased in 2018 to 2,853 globally, an approximately 4.1 per cent increase from 2017 (according to data provided by Mergermarket). On the sell side, private equity-backed exits decreased with respect to deal volume in 2018 to 1,705 deals, compared with 1,802 deals in 2017 (according to data provided by Mergermarket). Globally, capital raised by private equity funds totalled approximately US$426 billion, down approximately 25 per cent from 2017 (Preqin).
Announced M&A deal value in 2018 in the Americas totalled approximately US$1.7 trillion, reflecting an increase of approximately 14 per cent from 2017 levels (according to data from Mergermarket). Although M&A activity in the US was strong in 2018, with total deal value at approximately US$1.6 trillion compared with US$1.4 trillion in 2017, deal volume in the US experienced a slight decline relative to 2017, totalling approximately 6,300 deals, a 2 per cent decrease from 2017 (according to data from Mergermarket). M&A deal volume for targets located in Latin America decreased from 2017 levels by approximately 9 per cent, with 619 deals in 2018 (Mergermarket). However, total deal value for targets located in Latin America was approximately US$103 billion in 2018, up approximately 1.3 per cent from US$101.6 billion in 2017. US private equity activity remained high overall in 2018 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$239 billion over 1,282 transactions, representing an increase of 24.5 per cent in deal value and an increase of 6.3 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 2018 included Kohlberg Kravis Roberts & Co’s (KKR) acquisition of Fiat Chrysler Automobiles NV’s auto-parts arm for €6.2 billion, which KKR has stated it plans to combine with its existing portfolio company, Calsonic Kansei, and the US$3.02 billion take-private of Financial Engines, Inc by Hellman & Friedman, an add-on acquisition that complements its existing portfolio company, Edelman Financial Engines, LP. Notable completed private equity acquisitions in the Americas included the acquisition of Dr Pepper Snapple for US$21 billion by BDT Capital Partners, Dr Pepper/Seven Up Bottling Group, JAB Holding Company, Keurig Green Mountain, Inc and Mondelez International, which was the largest deal to close in 2018; Blackstone’s US$17 billion buyout of 55 per cent of The Financial & Risk Business of Thomson Reuters (renamed Refinitiv) and the US$9.9 billion take-private of Envision Healthcare by KKR.
Europe, Middle East and Africa
Announced M&A deal value in Europe, the Middle East and Africa for targets located in the region totalled approximately US$1 trillion in 2018, an increase of approximately 16 per cent from US$908 billion in 2017 (Mergermarket). Europe accounted for approximately US$988 billion of total announced M&A deal volume, up 17 per cent from US$846 billion in 2017 (Mergermarket). M&A deal value involving the Middle East and Africa increased slightly to US$65 billion, a 4 per cent increase compared with 2017 value (Mergermarket). In Europe, there were 11 mega-deals announced in 2018, an increase of six from the five mega-deals announced in 2017, and all of the mega-deals were announced within the first five months of the year (Mergermarket). European-based financial sponsor activity (including exits, buyouts and secondary buyouts) increased to US$288 billion, an increase of approximately 7 per cent from US$270 billion in 2017. Private equity sponsors achieved US$98 billion of exit activity for targets located in Europe, which represented a 10 per cent decrease compared with 2017 levels. In the Middle East and Africa, inbound M&A volume increased by 4 per cent from 2017 levels to US$65 billion; however, US investments into the region was slightly down from 2017 levels, with US$20 billion-worth of investments over 50 deals in 2018, as compared with US$26 billion over 58 deals in 2017 (according to data provided by Mergermarket). Notable announced and completed European private equity transactions in 2018 included Unilever’s US$8.1 billion carve-out of its spreads business to KKR, the €2 billion sale of AniCura AB to Mars Inc by Nordic Capital and Advent International’s US$1.65 billion take-private of Laird.
Announced M&A deal value in the Asia–Pacific region, excluding Japan, totalled approximately US$717 billion across 4,036 deals in 2018, which represented an increase of approximately 2.6 per cent from comparable deal value in 2017, with the overall 2018 volume reaching its second highest annual value on record (Mergermarket). In 2018, there were five announced mega-deals in the Asia–Pacific region, excluding Japan, which was a slight increase from the four announced mega-deals in 2017 (Mergermarket). India featured prominently in the region’s transaction activity, owing largely to Walmart’s US$16 billion acquisition of Flipkart, one of India’s largest online marketplaces. Announced outbound M&A deal value in Japan totalled approximately US$171.8 billion in 2018, its highest point on record, with 26 outbound Japanese deals worth over US$1 billion (Mergermarket). China’s outbound M&A activity decreased to US$405 billion over 1,829 deals in 2017, a decrease of approximately 7.5 per cent in deal volume and a decrease by 2.4 per cent in deal value from 2017 levels (Mergermarket). Private equity activity for targets located in the Asia–Pacific region, excluding Japan, increased by 77 per cent in 2018 to US$188 billion from US$106 billion in 2017. Outbound private equity activity for bidders located in the Asia–Pacific region, excluding Japan, remained relatively stagnant at US$310 billion, an approximately 1 per cent increase from US$307 billion in 2017. Outbound activity in the Asia–Pacific region, excluding Japan, increased by 52.4 per cent over 2017 levels to US$160 billion in 2018. Foreign investments into the Asia–Pacific region, excluding Japan, totalled approximately US$123 billion in 2018, an increase of 4.4 per cent from 2017. Private equity sponsor exits of targets located in the Asia–Pacific region, excluding Japan, totalled US$93 billion in 2018, which represented an increase of approximately 232 per cent from US$28 billion in 2017. In Japan, the value of private equity exits was US$1.5 billion in 2018, a decrease of approximately 65 per cent from US$4.25 billion in 2017. The value of private equity also decreased to US$1.99 billion in 2018, representing an approximately 88 per cent decrease compared with 2017 (all of the above data provided by Mergermarket). Notable private equity transactions in the Asia–Pacific region included the approximately US$7 billion acquisition of Du Xiaoman Financial by a consortium that included TPG Capital and The Carlyle Group, among others; the approximately US$1 billion acquisition of I-MED Holdings Pty Limited by Permira Advisers Ltd; and the approximately US$768 million acquisition of Accolade Wines Australia Limited by The Carlyle Group.
In 2018, US syndicated M&A loan volume saw a healthy increase of approximately 20.1 per cent to US$648 billion, up from US$537 billion in 2017 (Thomson Reuters). High-grade M&A loan volume was US$268 billion in 2018, an increase of approximately 18.6 per cent over the US$226 billion in 2017 (Thomson Reuters). Leveraged M&A loan financing ended 2018 at US$228 billion, second only to the US$258 billion raised in 2015 (Thomson Reuters). Leveraged buyout loan financing was US$153 billion in 2018, second only to the US$207 billion raised in 2017 (Thomson Reuters). Median senior debt percentages for private equity leveraged buyouts in the US decreased to 47 per cent of enterprise value in 2018, down from 53 per cent in 2017, while the leveraged buyout purchase price multiple also decreased slightly to 10.6x of enterprise value for private equity leveraged buyout transactions, down from 11.6x of enterprise value in 2017 (TM Capital).
Portfolio company sales and IPOs
Portfolio company exits by private equity sponsors saw a healthy increase during the past year. Globally, financial sponsors exited approximately US$417 billion of investments, which represented an approximately 15 per cent increase from 2017 levels (according to data provided by Mergermarket). Strategic acquisitions remained the primary exit route, representing 58 per cent of all private equity-backed exit volume (Preqin). In 2018, the global private equity market saw a decrease in secondary buyout activity with a volume of US$131.46 billion, accounting for 13.5 per cent of global financial sponsor overall deal value (Mergermarket). Add-on acquisitions accounted for 42 per cent of deals announced in 2018, which was the largest proportion of any deal type last year (Preqin). The US led total financial sponsor exits with US$206 billion over 760 transactions, an increase in deal value of 4.57 per cent from US$197 billion over 766 transactions in 2017 (Mergermarket).
Notable completed portfolio company investment exits in 2018 included the US$8.3 billion sale of BMC Software, Inc by a consortium including Bain Capital Ventures, Elliot Management Corporation, GIC, Golden Gate Capital and Insight Venture Partners to KKR and the US$6.7 billion sale of Sedgwick Claims Management Services, Inc by KKR and Stone Point Capital to The Carlyle Group.
Globally, financial sponsor-backed IPOs and follow-on offerings accounted for 11 per cent of all exits in 2018 (Preqin). In the US, private equity-backed companies completed 44 IPOs in 2018, a slight decrease from the 45 private equity-backed IPOs in 2017; 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 (Nasdaq). While the number of private equity-backed IPOs was down in 2018, IPO proceeds hit a four-year high (Nasdaq). By the end of the year, total proceeds from such offerings in the US were approximately US$16 billion, an increase of 19.4 per cent from US$13.4 billion in 2017 (Renaissance Capital). In 2018, there were 190 completed IPOs, with a total value of approximately US$46.8 billion, up 32 per cent in capital raised in 2017 (Renaissance Capital). The median dollar amount raised in 2018 was US$108 million, a decrease of 10 per cent from US$120 million in 2017 (Renaissance Capital).
Notable private equity portfolio company listings in 2018 included the listing of ADT on the New York Stock Exchange raising approximately US$1.47 billion, a holding of Apollo Global; the listing of Brightview on the New York Stock Exchange raising approximately US$469 million, a holding of KKR; and the listing of Sonos on Nasdaq, which raised approximately US$208 million, a holding of a consortium of investors that included KKR as lead shareholder (Renaissance Capital).
Healthy year in private equity fundraising
Although private equity fundraising decreased by 24 per cent in 2018 in comparison with 2017 (which was a record year for private equity fundraising), private equity fundraising remained healthy. Capital raised by private equity funds globally totalled approximately US$432 billion (all statistics herein provided by Preqin). Furthermore, 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. For example, the 10 largest private equity funds that reached a final close in 2018 raised 24 per cent of total capital raised in 2018 and private equity funds of US$1 billion or more raised US$264 billion in 2018.
Overall, conditions for private equity fundraising are healthy, and competition among fund sponsors continues to increase. The number of private equity funds closed in 2018 dropped by approximately 30 per cent globally, with the average size of today’s private equity funds increasing to US$363 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 strong performance by private equity funds and record distributions to investors in recent years have provided an ongoing source of liquidity for many institutional investors and have led to an increase in overall allocations to private equity for many institutional investors, broadening both the breadth and depth of the private equity asset class among investors. Moreover, given that private equity as an asset class has outperformed the public markets and has been more stable relative to the volatility in the public markets in recent years, institutional investors may increasingly shift allocations from the public markets to private equity. Given this, funds possess a nearly unprecedented amount of ‘dry powder’, or capital not yet deployed, with US$1.2 trillion on hand as of December 2018. As a result of such increased levels of dry powder, coupled with the availability of financing, the number of private equity deals announced throughout 2018 reached an all-time high and aggregate deal value reached the second-highest amount since the global financial crisis. However, certain private equity sponsors and investors remain concerned about asset pricing.
It is expected that overall fundraising levels will remain strong in the near term as 3,749 private equity funds are seeking to raise approximately US$972 billion as of the beginning of 2019, despite continuing economic concerns and political volatility, and that the records, trends and developments witnessed in 2018 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 Securities and Exchange Commission 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 2019
There is some trepidation as to whether global M&A levels will remain robust in 2019. Despite strong deal flow at the start of the year, which may simply be a continuation of the strength from 2018, many deal professionals are concerned that we may be nearing the peak of an M&A cycle, with activity levels potentially beginning a decline. Uncertainties stemming from recent stock market volatility and from the continued expansion of Committee on Foreign Investment in the United States review by US regulators could potentially have a dampening effect on M&A transactions in the US this year. Although private equity firms have record levels of dry powder, market volatility in both the equity and debt markets can create sufficient uncertainty such that sponsors will be hesitant to ‘pull the trigger’. To the extent that we see continued high valuations, we are likely to see sponsors continuing to explore add-on acquisitions, in order to harness synergies and find other ways to achieve returns on investment.