Breakfast with PitchBook – Recap of 2019 and Predictions for 2020

PitchBook’s James Gelfer, Senior Strategist and Wylie Fernyhough, Analyst, updated ACG members with reflections on 2019 and predictions for 2020 on the Mergers & Acquisitions, Private Equity and Venture Capital markets. Their focus was mainly on the United States.

Let’s dive right into James and Wylie’s messages.

Venture Capital investments in 2019 nearly matched 2018’s $135 million, more than double the average of the previous 8 years. Deal count was slightly higher at 10,000, roughly the average number of deals over the previous 6 years. Deal size has grown significantly over the previous two years.

Private equity did $627 billion in deals last year, second to 2018 which was slightly larger. For only the second time transactions exceeded 5000.

In 2019 the average deal traded at 11 times EBITDA. Rich by historical standards but not surprising given a 29% rise in the public markets (S&P 500) while earnings for S&P companies were slightly down from 2018 levels.

Private Equity exits had an interesting mix. For the first time Secondary Buy Outs (Private Equity to Private Equity deals) captured more than 50% of transactions at 58%, while Corporate Acquisitions were between 39-40% and IPOs between 2-3%, ten-year lows. The weak IPO market had two main causes:

• The government shutdown at the beginning of 2019 and shutdown threat in late 2019 impeded the approval process companies require to execute an IPO
  
• The We Work IPO debacle was a wake-up call to Boards to make sure they were really prepared for all aspects an IPO requires
  

U.S. Private Equity fundraising in 2019 topped $ 300 billion for the first time. This despite the actual number of new funds being down from 2018. (At $97 billion Europe also had its largest fundraising year within the last decade). James and Wylie attributed the continued growth in fundraising to two key factors:

• “The Denominator Effect” – high asset values across the board have created more wealth to be invested in any asset class, including Private Equity.
  
• Private Equity funds have been distributing more cash back to the Limited Partners, who reinvest those distributions in a different Private Equity deal.

Prediction for 2020:

• Private Equity Fundraising will fall slightly below 2019 levels but remain strong on an historical basis.
  
• Continued expansion in Growth Equity Deals (Funds adding more capital to their current investments rather than bringing in new investors).
  
• General Partners will begin holding top performing assets longer… if the Limited Partners will allow it. Common but still appropriate comment on this space, “Too much money, chasing too few deals”. If we are in a good deal let’s keep investing in it. (An interesting conundrum came up when Brad Gevurtz, ACG President, asked why the fund managers 2 and 20 rate structure hasn’t changed for years even though the fees for public company’s M&A services have been hammered over that time. Large funds recently raising are oversubscribed so they still control the pricing hammer.
  
• Venture Capital to Private Equity buyouts will continue to proliferate. Over the past 8 years the percentage of VC to PE deals has moved from 11% of the total to 19%. This phenomenon is driven by tech companies owned by Venture Capital making great add-ons to the portfolio companies included in the Private Equity funds.
  
• Sovereign wealth funds and pension plans will become more sophisticated investors, increasing control over their investments and competing with Private Equity for investments. A great example of these are the Canadian pension funds who are growing their investment teams and to a lesser extent United States pension funds.
  
• Large asset managers have been buying smaller asset managers to fill holes in their portfolio – This trend will continue. One intriguing trend is that investors are starting to buy interests in the fund managers earnings rather than stakes in the funds the mangers are managing
  
• The big four public General Partners will continue to expand their strategic offerings at twice the rate of comparable private General Partners
  

Thank you, James and Wylie for your morning snapshot of 2019 and the predictions for 2020 of M&A, PE and VC markets.

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