Bill Curbow is a partner at Simpson Thacher & Bartlett LLP in the firm’s corporate department, where he focuses on mergers and acquisitions. He represented Vodafone in the US$130 billion sale of its 45 per cent stake in Verizon Wireless to Verizon Communications – the third-largest M&A transaction in history.
Here, Curbow, fellow Simpson Thacher partners Atif Azher and Peter H Gilman, and corporate associates Fred de Albuquerque and Audra Cohen, look at developments in private equity markets worldwide.
During the first half of 2018, global mergers and acquisitions deal volume measured in dollars increased from 2017 levels despite a decrease in overall activity levels. Global deal volume increased to US$1.94 trillion, representing a 28.3 per cent increase relative to US$1.49 trillion from the first half of the prior year, and the strongest first half of any year since the financial crisis, according to Mergermarket. Meanwhile, worldwide deal activity levels trailed about 11.2 per cent compared with the first half of 2017, with 8,560 deals announced versus 9,637 deals during the same period last year. Despite political uncertainty, M&A activity in the European Union increased dramatically, and the Americas and Asia mirrored the global surge in M&A activity with increases as well. The period saw a continued global increase in announced ‘mega-deals’ with a value greater than US$10 billion. According to Mergermarket, 26 such mega-deals have been announced since the beginning of 2018, only four short of the total number of mega-deals announced during all of 2017. Private equity deals accounted for US$518.6 billion in global deal activity, which constitutes a 22.5 per cent increase in value relative to the first half of 2017, according to Bloomberg. According to Preqin, private equity buyout exit value also increased in the first half of 2018 relative to the same period in 2017. In the first half of 2018, private equity sponsors achieved US$164 billion in exits with 885 deals, as compared to $140 billion with 943 deals during the first half of 2017 (Preqin).
M&A deal volume in the Americas totalled US$1.1 trillion in the first half of 2018, reflecting an increase of 52.8 per cent from the first half of 2017 (Bloomberg). According to Bloomberg, the United States continues to drive M&A activity in the Americas, accounting for 90.9 per cent of the region’s total. US-based transactions reached US$953.1 billion, representing a 58.7 per cent increase over the same period last year. Private equity activity in the United States was mixed during the first half of 2018 as compared with 2017, with total deal volume increasing 2 per cent to 2,247 deals and total deal value declining 6 per cent to US$263.9 billion for US-based targets, according to data supplied by PitchBook. Small investments and add-on acquisitions continued to be major private equity trends in the first half of 2018, with PitchBook reporting deals below US$25 million and add-on acquisitions accounting for about 40 per cent and 66 per cent of all US buyout activity during the period, respectively. The information technology sector continues to remain popular among financial sponsors, accounting for 17 per cent of private equity deals through June 2018, up 8 per cent of all private equity deals. US private equity exit volume slightly decreased from 2017 levels to US$83.5 billion over 481 deals in the first half of 2018 (PitchBook). Deal size has increased alongside the growth in the number of private equity deals, with the median deal size reaching US$197.1 million during the first half of 2018, a 31 per cent increase over the median deal size for the full year of 2017 (PitchBook). Notable private equity transactions in the Americas in the first half of 2018 include: the US$9.9 billion take-private of Envision Healthcare Corporation by KKR, the largest private equity-backed buyout announced during the second quarter of 2018; the US$8.3 billion secondary buyout of BMC Software by KKR; the US$3.5 billion take-private of Blackhawk Network Holdings by Silver Lake; and the US$3.02 billion take-private of Financial Engines, Inc by Hellman & Friedman LLC.
Europe, Middle East and Africa
Despite lingering political uncertainty surrounding the terms of Brexit negotiations, M&A deal volume in Europe, the Middle East and Africa (EMEA) during the first half of 2018 reached its highest value since the financial crisis, according to Mergermarket, totalling US$527.5 billion, a 34.8 per cent increase in deal volume from the first half of 2017 (Bloomberg). According to Bloomberg, the United Kingdom, Germany and Spain were EMEA’s most acquisitive regions, accounting for about 55.0 per cent of its total deal volume with US$311.4 billion in value. EMEA private equity deal flow accounted for US$150.7 billion in the first half of 2018, a 24.4 per cent increase from the first half of 2017. The number of private equity deals in the region, however, decreased by 7.3 per cent over the same period (Bloomberg). Notable private equity transactions in the first half of 2018 include Unilever’s US$8.1 billion carveout of its spreads business to KKR and Advent International’s announced US$1.65 billion take-private of Laird.
Announced M&A deal volume in Asia-Pacific totalled US$452.5 billion in the first half of 2018, which represented a 10.8 per cent increase from comparable deal volume in the first half of 2017, according to Bloomberg. Japan experienced an increase in M&A deal volume, totalling US$17 billion and representing an 18.1 per cent increase as compared to the first half of 2017, according to 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. Chinese outbound M&A volume into the United States declined 54.3 per cent as compared with the first half of 2017, in part due to expanded CFIUS scrutiny of these transactions. Total Chinese outbound M&A, however, reached US$63.4 billion during the first half of 2018, contributing to a 52.1 per cent increase in outbound M&A from the region (Mergermarket). Private equity activity in Asia-Pacific in the first half of 2018 was valued at US$119.6 billion, which represents a 32.7 per cent increase as compared to the first half of 2017, according to Bloomberg. Asia-Pacific activity (excluding Japan) in the first half of 2018 was US$72.1 billion, a 78 per cent increase on US$40.5 billion for the same period in 2017.
Debt financing markets
Financial sponsors generally found ready access to debt financing over the first half of 2018. Leveraged buyout loan issuances were globally flat at US$46.7 billion as compared to the same period last year (Thomson Reuters). Overall M&A leveraged loan volume in the first half of 2018 increased 18 per cent over the same period last year, in large part as a result of US$120 billion in non-leveraged buyout issuances (Thomson Reuters). In the second quarter of 2018, average debt-to-EBITDA multiples for broadly syndicated leveraged buyout transactions were holding firm at 6.3x overall, and 6.1x for institutional middle market leveraged buyouts over the same period (Thomson Reuters). For the first half of 2018, average purchase price multiples were at 10.4x for broadly syndicated leveraged buyout transactions, and 11.3x for institutional middle-market deals (Thomson Reuters). The average equity contribution for broadly syndicated leveraged buyouts declined to 36 per cent overall, and are at 47 per cent for institutional middle market leveraged buyouts (Thomson Reuters).
“Private equity dealmaking is witnessing an increase in deal volume, new entrants and non-traditional investors.”
Private equity fundraising remains strong
Global private equity fundraising remains strong. During the first three quarters of 2018, US$577 billion of private capital was raised which represents the largest amount of capital raised over the same period of any year other than 2017, according to Preqin. Fundraising by established, top-performing sponsors has remained robust, accounting for a significant portion of the capital raised, and reflects continued consolidation within the private equity fundraising market in favour of such established sponsors with proven track records. This consolidation has resulted in a significant concentration of capital with funds of $1 billion or more representing 63 per cent of total capital raised (up from 59 per cent over the same period in 2017).
Competition among private equity funds has continued to increase as the number of funds in the market has grown to record levels along with corresponding growth in the aggregate amount of PE capital being sought. The amount of capital targeted by private capital funds has increased over 50 per cent since the begninning of 2017 to over $1.5 trillion, according to Preqin (as of October 2018).
Strong continued economic growth in the United States and a stable interest rate environment, coupled with recent regulatory reforms, have contributed to a resurgence in larger, private-equity backed transactions, which in turn has contributed to additional growth in private equity fundraising in North America as private equity firms deploy their existing dry powder. In Q3 2018, private equity funds focusing on North America raised over $82 billion, reflecting a significant increase over the prior quarter where $42 billion was raised, according to Preqin.
While fundraising within most private equity asset classes is performing well, the private debt space has been particularly successful in recent years as demand for customised financing solutions and a pullback by traditional lenders has created significant opportunities in private credit. Private debt funds have raised more capital during the first three quarters of 2018 (approximately $86 billion according to Preqin) than any of the past five years. Additionally, there has been a continued focus in private equity fundraising on strategic relationships and alternative fundraising strategies.
Outlook for the remainder of 2018
We expect the fourth quarter to be incredibly strong from a private equity fundraising perspective, as a number of ‘mega’ funds will be seeking to raise capital in 2018–2019 and overall economic conditions remain very attractive for private equity fundraising. The largest private equity firms continue to account for a large proportion of fundraising activity, with the 10 largest funds closed during the third quarter of 2018 raising 55 per cent of all funds during the same period. Competition is increasing, however, with a record 3,992 private equity funds in the market as of October 2018. As larger funds increasingly seek out more sizable and complex cross-border investments while other large funds adopt more thematic strategies or sector focuses, private equity dealmaking is witnessing an increase in deal volume, new entrants and non-traditional investors. When combined with relatively easy access to debt financing, deal flow and private equity fundraising seem positioned to remain robust during the remainder of 2018. The concentration of capital in the PE industry and the ‘flight to quality’ are both expected to accelerate, and to the extent there is volatility or a downturn in the public markets in the near to medium term we believe that may spur investors to seek more stable, attractive investment opportunities and contribute to additional growth in both the private equity and private credit spaces.