Fitch: PE Deal Activity May Slow Next Year Despite Record Dry Powder

Nov 18 2016 | 8:39pm ET

Private equity deal activity is unlikely to soar next year even with record amounts of dry powder available, according to a new report from investment ratings company Fitch.

The lower velocity is partly ascribed to a more cautious approach to new transactions in light of elevated market valuations, Fitch said in a statement. The findings are part of the company’s latest U.S. Diversified Alternative Investment Managers: 2016 Update Report.

Uncalled capital, or dry powder, is at near-record levels industry wide, the report says, with Fitch-rated diversified alternative investment managers holding $273.5 billion in aggregate dry powder across private equity, credit and real estate strategies as of Sept. 30, 2016, up 7.5% year over year. According to Preqin, industry PE dry powder totaled $1.48 trillion as of October 2016; up 17.3% from year-end 2015. Buyout dry powder was at a record high at $541.8 billion as of October 2016, which was 12.8% above the 2008 peak of $481.1 billion.

"The diversified alternative investment manager industry is at an inflection point in the cycle as exit activity and investment activity have both declined in 2016,” said Meghan Neenan, senior director at Fitch Ratings. “[We] expect realization activity could moderate further into 2017, while investment activity will be more heavily dependent on identifying attractive opportunities in a very competitive environment.

Buyout deal value dropped 16.3% in the first nine months of 2016 although the number of deals was relatively flat, ticking up 1.7%, the report said. Excluding the $40 billion Heinz/Kraft deal announced in 2015, year-over-year comparisons suggest deal value was down just 2.6%. 

Since market valuations remain high, Fitch believes diversified alternative investment managers are becoming more cautious on new deal activity, evidenced by declining debt multiples in M&A transactions and a higher proportion of equity in new private equity deals.

On the exit front, PE-backed exits fell 36.6% in the first nine months of 2016, Fitch said, partly due to large numbers of exits in recent years as well as more volatile equity markets that have been less supportive of IPOs. As a result, Fitch believes exit activity will continue to slow in coming quarters.

Solid private equity fundraising continued in 2016, with $256.5 billion of capital raised in the first nine months of the year - +19.9% year over year. Fund sizes have also grown, which Fitch believes supports the notion that LPs continue to consolidate more of their investment capital with larger managers.

"In general, fund launches are taking longer to close than pre-crisis which can take managers away from deal activity; however, the duration between fundraising rounds has been extended given an increase in average fund sizes," added Neenan. "Sector specific funds continue to attract meaningful capital, with infrastructure funds representing some of the largest fund closes in 2016."

Fitch believes the outlook for the diversified alternative investment management industry is stable, as overall issuer fundamentals are expected to remain solid given the locked-in nature of the majority of the fee streams. 

However, management fees could be under modest pressure for some, the company said, if the deployment of dry powder is delayed by an absence of attractive investment opportunities and given the potential for further hedge fund outflows. Nonetheless, Fitch expects leverage ratios to improve for most, with incremental fee-related EBITDA growth driven by cost controls, increased scale, continued fundraising, and the gradual deployment of fee-earning assets under management that earns fees on invested capital.

The full report, entitled U.S. Diversified Alternative Investment Managers: 2016 Update, is available at

Fitch Ratings is a leading provider of credit ratings and research, and is part of Hearst’s Fitch Group of companies. 

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