The first quarter of this year saw sponsors announce 16 deals valued at a collective US$37b. If Q1 activity is any indication, momentum is poised to continue unabated. Technology and health care are the largest target sectors for these deals вЂ“ together, they accounted for almost two-thirds of PE take-private deals last year. While still nowhere near the heady days of 2007, take-privates continue to offer a steady source of deal flow for PE firms, exceeding more than US$100b in activity last year. Take-privates continue to offer opportunity for PE, despite a shrinking pool of targets

For PE firms with the ability to execute, such deals can be compelling opportunities вЂ“ relative to other deals types, the complexity involved with large carve-out transactions is a natural barrier to entry, allowing those firms with the sophistication and experience (and the right levels of dry powder) the opportunity to operate with less competition. The first quarter saw a number of high-profile carve-outs go to PE firms, including the US$3.4b acquisition of Evonik IndustriesвЂ™ methacrylates chemicals business by Advent International, and the acquisition of Kroger Co.вЂ™s Turkey Hill Dairy business by Austin-based Peak Rock Capital. Moreover, reductions in the US corporate tax rate have reduced the tax burdens of large asset sales. According to a report from Activist Insight, in 2018 more than 900 companies received governance-related proposals from activists, a figure thatвЂ™s grown more than 40% over the last five years. Increasing activity by activist investors is leading many companies to trim their portfolios on a proactive basis. Timing is right to capture value вЂ“ early movement positions PE firms to capitalize on increased growth rates and access to companies at earlier stages of their maturity curve.Д¬arve-out opportunities increasing as strategics recover from M&A hangoverДЄfter successive years of record-setting M&A activity, strategics are increasingly looking to divest many of their noncore assets in order to focus on their core businesses.ДЄ number of dynamics are increasing the number of carve-out opportunities in the market.Less intermediation вЂ“ many of these companies are looking for partners with value-adds beyond capital, allowing PE teams to differentiate themselves in order to secure deals.A broader investible universe вЂ“ the large amount of smaller family-run and entrepreneur-owned businesses not interested in selling to PE are often amenable to majority stakes.In some regions, notably Europe, the number of growth capital vehicles currently raising capital is exceeding the number of buyout vehicles for the first time ever according to Preqin data.ДЇor PE firms, the space is compelling for a number of reasons: Recent PitchBook analysis found that funds that execute more add-on deals generate better cash multiples across most vintages. With large-scale platform transactions remaining prohibitively expensive in many cases, firms are looking to add-ons as a way to reduce their purchase multiples.

PE firms have announced US$175b in global add-on acquisitions since the beginning of 2018, accounting for nearly a quarter of PEвЂ™s total spend. Add-ons grow as sponsors look to lower average purchase multiples

PE firms are leveraging add-ons, growth capital, and complex carve-outs as strategies to build compelling portfolios and mitigate continued high valuations, which have averaged 10.6 times EBITDA over the last two years, according to Leveraged Commentary and Data (LCD). In Q1 2019, firms announced transactions valued at US$96b, down 24% from Q1 2018.ДЄmid this backdrop, PE firms are seeking ways to remain active and engage in opportunities where they can add value while avoiding the worst of todayвЂ™s high-price environment. However, 2019 is off to a slower start as concerns around Brexit, escalating trade tensions and the late stage of the current cycle all seem to be coming to the forefront. PE firms are seeking ways to remain active while mitigating continued high valuations.Дў018 represented the strongest year for PE activity since before the financial crisis, as strong earnings, overall positive macroeconomic sentiment and the need to deploy more than US$700b in dry powder won out over the headwinds of increasing competition and continued high valuations.

How to add addons to pulse