April 24, 2018

Private Equity: The Sub-$1 Billion Fund Environment

This Akerman memo reports on the environment for private equity funds under $1 billion in size. The memo addresses deal flow, exit flow & fundraising for funds below $1 billion and those below $500 million in size. Here’s an excerpt on deal flow for sub-$500 million funds:

Deal activity was down slightly in 2017 in this sector of the market (funds less than $500M), as were purchase price multiples. However, compared to historical norms, both remain elevated. Last year’s deceleration in multiples was a sign of discipline and cautious optimism among investors, who are facing headwinds of increased PE competition, high valuations and the increased activity of fundless sponsors. In all, about $20.2 billion was invested in 2017 via 662 transactions.

Overall value was up slightly from 2016 ($17.9 billion), reflecting higher than normal price tags and the amount of new capital in the market, which totaled $16.9 billion last year. The PE market has enjoyed a historically long business cycle and historically low interest rates. The market is cautious at the moment.

Investors have found it harder to find good companies selling at good multiples, and additional work is being done to find potential value. To mitigate today’s multiples, sub-$500 million funds have taken to add-ons in large numbers as a way to achieve multiple expansion. The 363 add-ons done in 2017 represented 55% of total deal activity, and the $5.9 billion spent on add-ons last year was a record.

Valuations in this segment of the market remain high by historical standards. For deals under $100 million, the median EBITDA multiple was 6.8x in 2017. The report also says that because interest rates remain low, PE returns will not be too sensitive to increases this year – assuming that the Fed doesn’t move into panic mode.

John Jenkins