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Advisors, Private Equity

5 Scary Stats About Private Equity


Pitchbook recently released its quarterly breakdown of global private equity activity, and while some of the statistics may raise some eyebrows, the moral of the story is that private equity investors are living in a new normal. Competition has never been more intense, deal FOMO is very real and LPs are wisening to an environment where outperformance is a rarity and careful fund selection is paramount to achieving superior returns.

Here are 5 stats about the industry and how we, at Axial, see them playing out within the industry:

1. The number of funds closed is down from 2Q 2014, from 119 to 94.

LPs are becoming increasingly scrutinous of not only fund performance, but the way GPs differentiate themselves in the market to win over sellers. It’s not sufficient anymore to be a generalist private equity firm. Firms need to have a unique set of industry-specific strategies to help them stand out as the partner of choice to the CEOs they are targeting. That’s how funds will generate outsized returns, especially in a hyper-competitive environment.

Investors have also become keen to understand private equity firms’ deal sourcing and business development strategies. “Proprietary deal flow” is viewed with extreme skepticism now by smart LPs, and instead they’re focusing on whether or not the firm has a well-oiled business development machine to help maximize credible deal flow or whether it remains a haphazard and “everyone just chips in” process.

2. Capital raised is significantly down from 2Q 2014, from $90.7B to $43.7B.

Private Equity funds are sitting on a lot of dry powder right now, with a record year of fundraising in 2014 and money to put to work even from the last cycle. Some funds are spending this capital by investing in a greater number of smaller deals (including add-ons) and raising smaller funds because of it. On top of this, middle market and lower middle market deals are ones that have proven to offer maximum upside in investment performance. If you’re not one of the very few mega funds or a middle market firm with a great returns profile, you’re a bit betwixt and between.

3. PE deal flow is down 20% YoY, 12% from 1Q.

Securing consistent, quality deal flow remains a challenge for private equity firms. As the market becomes increasingly competitive, new entrants emerge, and the number of potential buyers further fragments, each individual firm is up against a lot to make sure they are seeing all the deals they want to. The boutique advisor movement and recent regulation has also made it so that almost anyone can sell a company and GPs are learning they have to be more proactive about building relationships with new intermediaries. It’s still a seller’s market and there’s more demand than there is supply. This will shift over the next few years as we begin to see baby boomers retire in droves, representing a significant transfer of ownership of mid-sized businesses.

4. Deal count, capital invested and median deal size are all down from this time last year. In Q2 2014, PE firms inked 1,608 deals compared to 1,279 this year. Capital invested dropped from $267.4b to $191.6b YOY. And the median deal size fell from $50m at 2nd quarter end 2014 to $32m this year.

2014 was a banner year, so it’s not surprising to see these numbers down across the board. In addition to a natural movement into the middle market, as well as a boost in add-on acquisitions as firms build upon their platform investments, firms have become averse to the headline risk of big deals. Even though we’re seeing smaller deals, 2015 will still be one of the strongest for the M&A market since the recession.

5. Too high valuations and unrealistic pricing expectations from sellers remain the top reasons investors struggle to close deals.

This was one of the key insights we gained from gathering over 200+ private market professionals at Axial’s recent New York City summit. Even though 80% of the crowd expects M&A activity to remain steady or increase in the second half of 2015, attendees still pointed to valuation levels and pricing expectations as the chief reasons some deals aren’t getting done. Both of these seem to be a function of the supply and demand dynamics we’re experiencing currently. With fewer deals to be had, some buyers are overpaying to win out and would-be sellers are using those deals as a barometer for what they should expect.


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