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Merrill Corporation Q&A – 2018 Private Equity Outlook

Dan Hostetter | Merrill Corporation | January 25, 2018

1. What does the private equity pipeline look like for next year?

Generally, robust. There are lots of processes in place on both the buy and sell side, including both traditional auction processes and one to one situations. We’ve been out talking to clients about our new dataroom platform for private equity and M&A deals, and they’re signing up because it lets them manage exits and acquisitions from the same place. That kind of fast adoption is a strong indicator private equity is getting ready for an action-packed year, and the advisor community is busier than ever.

2. What are hot private equity sectors or trends?

US PE activity by Sector

Technology has been very hot recently, and software M&A continues to be particularly strong. Vista Equity Partners closed an $11bn buyout fund last year just focused on software, for example.  We’re also really seeing PE firms jump on the bandwagon of chasing ‘disruptive technologies’, as PE loves anything that will upset mainstream sectors. As we’ve seen oil prices edge up closer to $70, that’s brought lots of private equity buyers into the energy space. 

3. Any headwinds?

One of the biggest issues is the disconnect between buyers and sellers on price. Because asset prices are high, private equity buyers need to be more careful about picking the right companies that will continue to grow through any potential market downturns.  While this disconnect has slowed down some processes, deals continue to close at a steady rate as buyers have a lot of capital to put to work.

4. How are PE fund managers tackling high deal prices?

Median Buyout Size in US

Many firms are focusing on opportunities where they can do “add on” transactions to scale their businesses. Some are focusing on niche segments in more fragmented markets, or trying to bargain shop in more obscure sectors. The fact of the matter is high price tags can’t be avoided these days, so the question becomes one of relative value.

5. What else is on PE managers’ minds?

One key issue is cybersecurity. Potentially leaking sensitive data remains a huge concern, and a big reason why private equity firms are talking to us about using our new platform not just for M&A transactions but ongoing file storage and sharing. In general, private equity firms are investing heavily in cybersecurity best practices and technologies. It’s really top of mind for them and their legal counsel.

6. How else do PE firms differentiate themselves in such a crowded environment?

Operating partners will become even more of a differentiating factor than they have in the past, as dealmakers source acquisitions from increasingly niche areas in terms of both size and sector. There will be auctions where one team’s expertise may help it win over other buyers who don’t have the same depth of sector-specific knowledge.

7. How do PE fund managers mitigate LPs concerns about high valuations impact on ROI?

For some time now, there’s been concern around whether the robust returns enjoyed by PE funds in the past will be as easily achievable or even replicable given recent high valuations. While investors can see returns are not at historic levels, they may have concluded that returns are still strong and compare favorably to other asset classes.

Read the 2017 Annual US PE Breakdown Report to see a full review of the year and get a head start on 2018.

Dan Hostetter is Global Head of Strategic Advisor Accounts at Merrill Corporation, responsible for leading the company’s private equity accounts team. Dan successfully founded and grew Merrill’s European and Asia business, and is a trusted SaaS-based transaction services advisor to financial professionals throughout the M&A and capital markets industry. His world-wide network and 23 years of deep M&A and Capital Markets expertise provides a unique outlook on today’s market.

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