Shortly after the 2008 financial crisis, private equity investors saw a downturn in dealmaking caused, in no small part, by the overall decline in the stock market and the new Dodd-Frank regulations. Since that time, however, private equity investments gained ground, and with record dry powder reserves totaling nearly $624 billion, will continue to do so. While some banks like the Spanish-owned BBVA note that the probability of a recession in the next 12 months is around 16 percent (the highest figure since 2012), many financial pundits predict that both cash reserves and innovative dealmaking could ensure strong, continued private equity activity.
2017 was a record breaking year for private equity, with 921 funds and assets bringing in $453 billion in aggregate capital. This pushed total funds raised to $2.83 trillion as of June 2017, according to a Walkers’ sponsored article in Private Equity International.
Despite the impending cyclical economic slowdown and the current geopolitical risks, PwC predicts the steady stream of private equity deals made will continue on through the end of 2018. The firm also forecasts consistent investment interests in the healthcare and technology sectors, and growth in add-on acquisition deals.
Because of the low supply of viable target companies, investors will likely need to overcome high valuations and increased competition when negotiating. PwC also identifies several possible trends in coming deals:
- Activist investing and antitrust regulations will encourage continued corporate carve out.
- Greater emphasis will be placed on deals that ensure both strong business models and management teams are in place. Companies will also need to deliver sustainable, achievable value creation plans.
- There will be an uptick in mega-deals, akin to the recent AT&T/Time Warner merger. Corporations need to be careful about clearing the recent increased regulation and security hurdles.
- Because of the increase in demand, buyers will experience a decline in the quality and time spent on due diligence. This means investors receive less data up front, and experience limited access to management teams. That said, savvy investors with sector-expertise who understand the industry-related risk could avoid potential roadblocks and still turn a profit.
- Capital will be deployed more innovatively and creatively through joint ventures, minority investments and more.
All in all, the bear market is likely to have minimal fall out on private equity investors this year. We’ll be keeping an eye on the market to understand implications for 2019 in the weeks and months to come.