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 2019, global mergers and acquisitions deal volume measured in dollars dropped from 2018 levels, with less cross-border M&A activity stemming from political uncertainty involving trade policy in the US. Global deal volume reached US$1.80 trillion, representing an 11 per cent decrease relative to the first half of 2018 but a 17 per cent increase relative to the second half of 2018, according to Mergermarket. Meanwhile, worldwide deal activity levels trailed about 21.1 per cent compared to the first half of 2018, with 8,201 deals announced versus 10,389 deals during the same period last year (Mergermarket). The Americas drove global M&A activity while Europe and Asia experienced dramatic slowdowns relative to 2018’s record year. The period saw a slight decrease in announced ‘mega-deals’ (deals with a value greater than US$10 billion), though such mega-deals drove growth in the US, where 19 mega-deals totalled to US$569.2 billion (Mergermarket). According to Mergermarket, 24 such mega-deals have been announced globally since the beginning of 2019, compared to 27 mega-deals during the first half of the prior year. Private equity deals accounted for US$550.6 billion in global deal activity, which constitutes a 1.8 per cent decrease in value relative to the first half of 2018, according to Bloomberg. With 326 deals during the second quarter of 2019, private equity buyout-backed exits declined for a third consecutive quarter (Preqin). Private equity buyout exit value likewise decreased during the first half of 2019 relative to the same period in 2018, reaching US$177 billion during the first half of 2019, representing an 11.9 per cent decrease relative to the first half of 2018 (Preqin). This decrease may be the result of a slow first quarter. Private equity buyout-backed exit value reached only US$44 billion during the first quarter of 2019 and returned to recent high levels with US$133 billion during the second quarter of 2019 (Preqin).
M&A deal volume in the Americas totalled US$1.2 trillion in the first half of 2019, reflecting an increase of 8.5 per cent from the first half of 2018 (Bloomberg). According to Bloomberg, the US continues to drive M&A activity in the Americas, accounting for 91.7 per cent of the region’s total. Much of this activity has been driven by domestic dealmaking, with six of the top 10 deals in the second quarter of 2019 being consolidations of US-based companies (Mergermarket). US-based transactions reached US$1.1 trillion, representing an 8.4 per cent increase over the same period last year. After a slowdown during the first quarter of 2019, private equity activity in the US returned to 2019 levels during the second quarter, reaching a total deal volume of 2,142 deals and total deal value of US$297.1 billion for US-based targets in the first half of 2019 (Pitchbook). Small investments and add-on acquisitions, however, continued to be major private equity trends in the first half of 2019, with deals below US$25 million and add-on acquisitions accounting for about 37 per cent and 70 per cent of all US buyout activity during the period, respectively, according to data supplied by Pitchbook. The information technology sector further increased its popularity among financial sponsors, accounting for 27 per cent of private equity deals to June 2018, representing a 58.8 per cent increase relative to the first half of 2018 (Pitchbook). US private equity exit volume decreased from 2018 levels to US$110.1 billion over 371 deals in the first half of 2019, relative to US$201.8 billion over 603 deals in the first half of 2018 (Pitchbook). Private equity deal size continued to increase, with the median deal size in the US reaching US$275.7 million during the first half of 2019, a 45.1 per cent increase over the median deal size for 2018 (Pitchbook). Three ‘mega-buyouts’ with a value greater than US$10 billion were announced in the US during the first half of 2019, equal to the total number announced in the US during all of 2018. Notable private equity transactions in the Americas in the first half of 2019 include: the US$14.1 billion take-private of Zayo Group Holdings, Inc by a consortium including EQT Partners and Digital Colony Partners, the largest private equity-backed buyout announced during the second quarter of 2019; the US$13.4 billion acquisition of GLP’s US logistics assets by Blackstone Group; the US$11.0 billion take-private of Ultimate Software Group by a consortium that included Hellman & Friedman and Blackstone, the largest of the three buyouts of technology companies that exceeded US$1.0 billion in the second quarter of 2019; and the US$10.2 billion acquisition of Buckeye Partners by IFM Investors.
Europe, Middle East and Africa
Driven by political and economic uncertainty that has discouraged M&A activity in Europe, M&A deal volume in Europe, the Middle East and Africa (EMEA) decreased in the first half of 2019 to its lowest level since the first half of 2017, totalling US$395.0 billion, a 31.8 per cent decrease in deal volume from the first half of 2018 (Bloomberg). Despite the slowdown in Europe, M&A deal volume in the Middle East and Africa increased by 59 per cent, primarily as a result of Saudi Arabian Oil Co’s acquisition of Saudi Basic Industries Corp for US$69 billion, the largest announced deal in the EMEA during the first half of 2019 (Mergermarket). According to Bloomberg, the United Kingdom, Germany and France were the EMEA’s most acquisitive regions, accounting for about 41.3 per cent of its total deal volume with US$162.5 billion in value. Due to government interventions and protectionism, European firms increasingly looked abroad, resulting in outbound M&A activity reaching US$74.1 billion, its highest level since the fourth quarter of 2017 (Mergermarket). EMEA private equity deal flow accounted for US$205.5 billion in the first half of 2019, a 17.3 per cent increase from the first half of 2018. The number of private equity deals in the region, however, decreased by 10.7 per cent over the same period (Bloomberg). Notable private equity transactions in the first half of 2018 include the US$10.1 billion acquisition of Nestlé’s skin health division by EQT Partners and the US$7.7 billion take-private of Axel Springer SE by KKR.
Announced M&A deal volume in Asia-Pacific totalled US$332.8 billion in the first half of 2019, which represents a 28.9 per cent decrease from comparable deal volume in the first half of 2018 (Bloomberg). In contrast to the general slowdown in the region, Japan experienced a slight increase in M&A deal volume, totalling US$18.1 billion and representing a 2.4 per cent increase as compared to the first half of 2018 (Mergermarket). Despite experiencing a 52.8 per cent decrease in M&A activity relative to the first half of 2018, India saw the US$6.0 billion takeover of Essar Steel India by ArcelorMittal and Nippon Steel & Sumitomo Metal, one of the largest deals in the region (Mergermarket). The trade war had a significant impact on China’s M&A activity during the first half of 2019, which declined 44.7 per cent as compared to the first half of 2018, according to Mergermarket. Outbound M&A value in the Asia-Pacific region (excluding Japan) totalled US$41.2 billion, representing a decrease of 25.0 per cent relative to the first half of 2018, with Chinese outbound activity into the US and Europe reaching its lowest levels since 2009 (Mergermarket). Private equity activity in Asia-Pacific in the first half of 2019 was valued at US$66.8 billion, which represents a 46.9 per cent decrease as compared to the first half of 2018, according to Bloomberg. Notable private equity deals include the US$4.43 acquisition of Healthscope by Brookfield Asset Management and the acquisition of AYUMI Pharmaceutical Corp by Blackstone Group, the value of which was not disclosed.
Debt financing markets
Financial sponsors continued to find ready access to debt financing over the first half of 2019. Leveraged buyout loan issuances globally were roughly on par with the same period during 2018 at US$57.0 billion (Refinitiv). Overall M&A leveraged loan volume in the first half of 2019 increased 14 per cent over the same period last year to US$189 billion (Refinitiv). In the second quarter of 2019, average debt-to-EBITDA multiples for broadly syndicated leveraged buyout transactions increased to 6.64x overall and 6.5x for institutional middle market leveraged buyouts over the same period (Refinitiv). For the first half of 2019, average purchase price multiples were at 12.7x for broadly syndicated leveraged buyout transactions overall and 13.3x for institutional middle-market deals (Refinitiv). The average equity contribution for broadly syndicated leveraged buyouts increased to 41.6 per cent overall and are at 49.2 per cent for institutional middle market leveraged buyouts (Refinitiv).
Steady first half in private equity fundraising
Although global private equity fundraising has slowed somewhat in recent years as compared to historic levels in 2016 and 2017, fundraising activity during the first half of 2019 was strong overall with 81 per cent of funds closed in the first half of 2019 achieving or exceeding their target size, according to Preqin. Fundraising by established, top-performing sponsors at the upper end of the private equity market continued to account for a significant portion of the capital raised. Although total capital raised in the first half of 2019 was on par with that raised in the first half of 2018 (US$221 billion as compared to US$201 billion (Preqin)), the number of funds closing decreased to 527 from 764 during the same period (Preqin). This reflects continued consolidation within the private equity fundraising market in favour of such established sponsors with proven track records.
In addition, due to increased investor demand, the fundraising process has been accelerated, with 41 per cent of funds closed in the first half of 2019 being in market for six months or less and more than 60 per cent of funds on the road for less than one year (Preqin).
Although the number of funds in market has increased in recent quarters, reaching 3,951 funds in market at the beginning of the third quarter of 2019, as compared to 3,037 in the third quarter of 2018, the amount of capital targeted by private equity funds remained relatively steady in recent years, increasing only 3.5 per cent from the same period in 2018 (from US$948 billion at the beginning of the third quarter of 2018 to US$981 billion at the beginning of the third quarter of 2019 (Preqin)).
Global macroeconomic uncertainty and difficult economic and political conditions in certain regions have shifted fundraising dynamics in favour of North America during the first half of 2019. However, as of the beginning of the third quarter of 2019, there were more than 1,500 funds in market targeting North America and Asia (Preqin). Additionally, there has been a continued focus in private equity fundraising on strategic relationships and alternative fundraising strategies.
Outlook for second half of 2019
We would expect deal activity in the second half of 2019 to roughly mirror activity levels in the first half of the year, with a significantly reduced volume of deals (measured in numbers) with a marginally reduced value of deals (measured in US dollars). Although private equity fundraising during the first half of 2019 failed to reach the historic and record-setting levels in 2016 and 2017, overall fundraising remains healthy by historical standards. The largest private equity firms continue to account for a large proportion of fundraising activity, with the five largest funds targeting 18 per cent of all funds as of the beginning of the third quarter of 2019 (Preqin). Competition is increasing, however, with a record 3,951 private equity funds in the market at the start of the third quarter of 2019, and funds are speeding up the fundraising process due to investor demand, with 41 per cent of funds that closed during the first half of 2019 closing within six months (Preqin). Additionally, private equity firms are contributing more equity to fund deals as increasing purchase prices, a result of rising stock prices, have pushed debt markets to near their limits, with equity comprising 52 per cent of purchases prices during the second quarter of 2019, relative to 45 per cent from the first quarter, according to data supplied by Covenant Review. The high levels of fundraising in recent years have resulted in a record US$1.54 trillion in dry powder at the end of the second quarter of 2019. On the fundraising side, commentators generally believe that the failure of global private equity to reach historic highs in the first half of 2019 resulted from the slight slowdown in global M&A activity, a product of political and economic uncertainty, but are optimistic that fundraising will continue to remain healthy.