Posted: 07 Jun. 2018 4 mins min. read

Private equity and M&A: Emerging trends amid a whirlwind of activity

Larger deal size, bolt-on opportunities to gain steam in market

By: Barry Curtis

Optimism was brimming last fall when we surveyed hundreds of private equity executives about their outlook for mergers and acquisitions in 2018—with some caveats. Tax reform, regulation, and the global economy all were seen as threats to derail optimism.

Those concerns have dissipated as tax reform is now law, banking regulations have been eased, and the global economy continues to demonstrate strength. These factors created a Goldilocks environment for private equity dealmaking. From healthcare to finance to technology, merger and acquisition activity is as strong as it’s been in years.

Looking ahead, momentum doesn’t seem likely to abate. Private equity firms raised large pools of capital in recent years and only now has the deal recovery begun. This indicates private equity sees a lot more opportunity going forward to deploy capital. And this is what we heard from private equity executives in Deloitte's 2018 M&A trends report, who said they expected increased activity and bigger deals.

Amid the whirlwind of activity, a few interesting trends are emerging.

For starters, while we’ve seen an uptick in the size of deals private equity firms are striking, there have been few very large deals—perhaps not as many as one would have expected given the strong dealmaking environment and the large pools of capital ready to be deployed.

More prevalent are platforms in which private equity firms acquire a company and follow up swiftly with several bolt-on acquisitions to gain scale. While this phenomenon isn’t completely new–private equity has always relied on bolt-on deals—this now seems to be more of the norm. Instead of seeing deals of $10 billion and up, we're more likely to see a $5 billion deal followed by perhaps three or four bolt-on acquisitions. The end result is the private equity firm holds the bigger company, but they are getting there from bolt-on deals.

Another trend revolves around the high relative valuations for companies (even with the recent market pullback)—fueled by bidding wars from large pools of capital which need to be deployed and exacerbated by lofty stock valuations. Because of high stock prices, we're seeing fewer public-to-private transactions. As much as 25 percent of the deals being struck now are between private equity firms. One buyer does a deal, layers or adds-on some companies, and then divests the company to another private equity firm.

Yet another issue with relatively high valuations is private equity firms now appear to be more focused on value they can bring to a business. Buyers now look at bolt-on opportunities where they have the experience, history, and expertise to really improve the business.

From an industry perspective, technology continues to be very active, running the spectrum from small deals in niche companies to larger technology firms. We see convergence with technology and the industrial and healthcare industries.

There’s always the threat of a macro-economic or political issue that can derail M&A momentum (as evidenced by the recent market pullback)—but in light of the current economic, tax, and regulatory environment, coupled with the dry powder of capital many PE firms have raised, the outlook for more and bigger deals is bright.

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