Amid a mixed M&A landscape, private equity (PE) was a trustworthy asset class for investors seeking strong returns. This is reflected in the level of buyout activity seen in 2017, with value reaching a post-crisis high, while volume recorded its highest annual total on record. There were 1,176 buyout deals worth US$190.8 billion announced over the year, a 12.3 percent increase in value and a 10.5 percent increase in volume compared to 2016.

Buyout firms seem to be focusing on high-quality assets, preferring to write larger checks for top performers rather than focusing on marginal deals. This resulted in some headline-grabbing buyouts during 2017. A consortium including Energy Capital Partners paid US$17 billion for energy group Calpine in the largest transaction of the year. And Abu Dhabi Investment Authority (ADIA) and GIC acquired Pharmaceutical Product Development, a contract research provider to the pharma industry, for US$9 billion.

Competition heats up

"It is very, very competitive right now, almost to a point where I think people are getting a little uncomfortable," says White & Case partner Oliver Brahmst. "It seems that it is now much easier to raise money than actually invest it." A record level of dry powder, which according to Preqin reached an all-time high of US$954 billion as of September 2017, prompted intense competition for transactions and drove deal values up significantly.

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Healthcare leads the pack

The healthcare sector saw significant buyout activity in 2017. "There's definitely been a focus on healthcare in PE," says Carolyn Vardi, partner at White & Case. "Within the industry, financial investors are becoming more sophisticated in order to understand how to comply with applicable regulations." ADIA and GIC's US$9 billion agreement to acquire Pharmaceutical Product Development, along with UK-based Pamplona Capital Management's US$4.9 billion purchase of life sciences consulting firm PARAXEL International, highlight the value financial investors place on the right targets.

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A seller's market

Exit activity similarly experienced a strong year, with 1,083 transactions valued at US$258.3 billion—an increase of 10 percent in volume and 8.5 percent in value year-on-year. The large sums that PE firms have to invest has ensured that the market remains favorable to sellers.

"The overall dynamic where PE funds have significant amounts of capital to deploy means sellers will continue to push for higher multiples and equity backstops to purchase-price payment, leading to the continued tension between equity backstops and the reverse-termination fees that PE fund purchasers favor," Vardi says. Against this backdrop of sky-high valuations, meeting sellers' increasing demands may present a challenge to investors in 2018.