Peak funding conditions experienced in 2017 continue to boost investor sentiment, but challenges loom.

In the first quarter of 2018, global private equity activity picked up right where it had left off in 2017, which saw a record volume of transactions. In the first quarter of the year, a total of US$113.7 billion was invested in 699 buyout deals—a 27% climb in value compared to Q1 2017, and the strongest start to a year since 2007.

Private equity activity by value Q1 2014 – Q1 2018Target location: Global Bidder location: Global Sectors: All SectorsPrivate equity deal type(s): Buyout and Secondary Buyout

 

According to research firm Preqin, robust fundraising has driven dry powder to new heights: US$1 trillion as of December 2017. With a surplus of money on their books, buyout funds’ appetite to spend is becoming insatiable.

Go big or go home

A supportive financing climate and global economic growth appear to be fueling bolder buyouts in 2018. A total of 28 deals individually exceeded the US$1 billion mark over the quarter, up from 20 in Q1 2017. Leading the pack was Blackstone’s announced US$17 billion purchase of Thomson Reuters’ Financial and Risk division—the fund’s largest buyout since the financial crisis and its seventh deal on record to exceed US$10 billion.

The deal caused the business services sector to top the sector league chart in Q1, with a total of US$23.6 billion spent across 103 deals. The sector, which encompasses businesses supporting the operations of other commercial enterprises, has seen record levels of private equity activity over the past few years, peaking at 522 transactions in 2017.

Activity has been fueled by the need to improve operational efficiencies and expand expertise in areas of high growth potential outside of core markets. As disruption continues to influence all corners of the market, PE firms will be under increased pressure to source firms with value-add potential.

Under pressure

Heightened competition is a double-edged sword. Booming stock markets are causing valuations to skyrocket. Meanwhile, a saturated market requires an increased focus on due diligence to find quality targets, which may become increasingly hard to come by. These conditions could motivate savvy investors to explore unorthodox sectors to find value and avoid overpaying.

And with interest rates predicted to increase across the globe in 2018, highly leveraged companies may find it more and more difficult to preserve their bottom line. Fitch warned in January that US interest rates could increase faster than expected over the following 18 months, potentially rising to 3.25% by autumn of next year. This will likely be mirrored across the Atlantic, as the Bank of England recently indicated that interest rates may increase sooner than previously anticipated.

But with record levels of dry powder available and favorable returns remaining achievable, PE funds will continue to take advantage of benign market conditions until a notable shift is visible.