US Private Equity 1Q Beakedown

 In Debt & Equity Markets

After 2018’s blistering pace of dealmaking, 2019 has gotten off to a sluggish start.

Poor performance in leveraged loan and high-yield markets during 4Q 2018 had an adverse impact on the cost of deal financing, causing many GPs to hold off on finalizing deals. These deals often take months to close, and difficulty securing financing is often evident in lower deal flow the following quarter. The deals that did close, however, were at elevated multiples similar to what we have witnessed in recent years. Pricing ought to remain competitive because GPs have record dry powder waiting to be invested, pressuring PE firms to act.

Exits experienced an even greater downturn than deals.

Public equity price decreases in 4Q 2018 likely led to GPs marking down portfolio companies, though to a lesser extent than seen in public indices. GPs instead held portfolio companies and awaited a friendlier selling environment. 1Q 2019 saw just one PE-backed IPO as GPs instead opted to sell portfolio companies to other financial sponsors or strategic acquirers, continuing recent trends. Market tranquility was sustained throughout the end of the quarter, so analysts expect the 1Q lull in exit activity to be short-lived.

Fundraising—unlike deals and exits—is on pace to match 2018’s annual total with over $40 billion raised in the first quarter.

Fewer but larger funds are closing, pushing median and average fund sizes even higher. Strategies beyond the vanilla buyout continue to proliferate, with technology focused and growth equity funds witnessing massive closes. The recent figures also speak to a longer-term change whereby GPs headquartered in the Bay Area and Chicago accounting for a swelling portion of capital raised.

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