BY Richard Summerfield
Building on an impressive 2017, 2018 looks set to be another strong year for the private equity industry, according to the Akerman 'PErspectives on U.S. Middle Market Private Equity' report, based on data from PitchBook.
Not only did the industry accumulate record levels of dry powder in 2017, but the US tax reform and persistently low interest rates were also beneficial, helping to drive record or near-record buyout and exit activity. The report also notes near-historical highs in several other categories for sub-$500m US buyout funds, including the number of deals and add-on deals closed, number of closed exits and fundraising.
Furthermore, US funds with less than $500m under management set record-highs in 2017 for total deal value, add-on deal value and deal exit value.
Overall fundraising for funds between $500m and $1bn grew last year. The sector raised a record $39bn , up from $35bn in 2016, and a total of 117 funds closed. Fundraising is expected to continue to grow in 2018, provided that the economy remains healthy.
Deal activity was down slightly in 2017, with 1133 transactions completed worth a combined $44.8bn, from 1258 deals worth $51.2bn in 2016. However, dealmaking is expected to grow in 2018, particularly in the mid-market, due to “heightened interest in Section 1202 of the Internal Revenue Code, which allows PE funds to avoid the 23.8 percent federal capital gains tax on dispositions of qualified portfolio companies”, according to Carl Roston, co-chair of Akerman’s Corporate Practice Group.
“In today’s market environment, PE fundraising and transaction volumes have maintained healthy levels thanks to a host of favorable market dynamics. Factors driving this PE activity include low interest rates, a growing economy, the reduction in marginal federal income tax rates, the relative outperformance of domestic middle market private equity compared to other asset classes, benign credit markets, and the rebalancing of portfolios by institutional investors,” said Mr Roston.
He added: “With growing competition and robust valuations for quality buyout targets, increasingly there is a premium on sophisticated deal sourcing through industry relationships, as well as on cost-effective and efficient processes that facilitate closed deals, collaborative relationships with management teams and prudent risk management.”