This year is off to an interesting start.  Markets are hanging around all-time highs and the global economy looks to be re-accelerating.  Will private equity follow suit?

Private equity research firm Pitchbook recently released their perspective on what 2017 has in store.

Global Deal Value and Transaction Counts

The 2016 year ended in a state of healthy, but cooling conditions.  Global deal value, measured in dollars, declined slightly from 2015 values to $649 billion.  That represents a decrease in deal value of about 12%.

On the transaction front, the number of deals declined from 4,131 in 2015 to 3,538 in 2016, or a decline of about 14%.  The fact that the number of deals declined more than deal value indicates that valuations are still on the rise.

What does Pitchbook see for 2017?  Generally, more of the same – meaning a healthy, but at times frothy, private equity deal market.  They don’t see a recession or any big increase or decrease in deal value or transactions, contrary to what some prognosticators see occurring in 2017.

Deal1 Source: Pitchbook

 

U.S. PE-Backed Companies

What about the overall state of the industry?  Will it continue to expand?  Pitchbook seems to think so, and the following graphic confirms that continued growth in companies backed by private equity is most likely to be the case.

Over the past 11 years, the number of U.S. private equity-backed companies has grown from 3,043 in 2005 to a high of 7,168 in 2016.  Fascinatingly, of the 7,168, almost all of the companies (shown in the right column in green) were backed in the 2011 to 2016 years.  The industry has grown, and looks like it will continue to grow at healthy rates in the coming years.

pe backed companies Source: Pitchbook

What Private Equity Sectors Might be a Little Frothy?

Presuming a backdrop of overall healthiness, which private equity sectors might be a little frothy?  Well, take a look at the following chart from the same Pitchbook report.  The figure shows the recent boom in the information technology (IT) and growth in the energy sectors.

In orange is the IT sector.  Overall, the number of deals closed continued to expand in 2016, going from 551 in 2015 to 567 in 2016.  Value exploded, going from around $75 billion in 2015 to around $150 billion in 2016.

The energy sector was not “as booming”, going from 210 closed deals in 2015 to 213 deals in 2016.  Value in the sector increased by a stronger margin, going from around $40 billion to around $50 billion.

All in all, 2016 was a good year to be a private equity-backed company.

What does 2017 portend?  Probably more of the same.  Perhaps some cooling in the IT sector, but no falling off a cliff – or perhaps not any cooling at all.

it value Source: Pitchbook

Conclusion

Overall, 2016 was a healthy year for the private equity industry.  If early indications are correct, 2017 looks to be more of the same – healthy business conditions, but not bubbly or recessionary.  Just healthy.  For the foreseeable future, it looks like it’s a good time to be in the private equity industry.

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Every year, Pitchbook - a provider of private equity dealflow data – provides a look at the top private equity firms according to various characteristics.  Here’s a review.

Most Active U.S. Firms

Before looking at Pitchbook’s figures, which firm would you guess comes out on top in the number of deals in 2016?  Interestingly, it’s probably not one of the ones you’re thinking of.  On top in 2016 was Audax Group, having been involved in 72 deals.

Other top active investor firms include ABRY Partners at 59, HarbourVest Partners at 54, GTCR at 38, and Kohlberg Kravis Roberts at 37.

1mostactiveus Source: Pitchbook

Most Active European Firms

What about Europe?  Which private equity firm would you guess comes out on top?  Perhaps a firm based in Germany, the economic leader of the EU – or perhaps Spain or France, where growth is more needed and people are a little more accepting of risk.  Here’s the view.

Interesting, the top private equity firm in Europe for the number of deals was BPIFrance at 62.  The remaining members of the top 5 include the Business Growth Fund at 50, the Ardian Holding at 40, Kohlberg Kravis Roberts at 35, and Carlyle Group at 28.

2europe Source: Pitchbook

Most Active Large Private Equity Firms

Let’s shift our attention to the large firms – firms with $5 billion or more in assets under management. Which firms would you guess come out on top?  Here’ s the list.

Interestingly, the most active firm with assets under management of $5 billion or more was Audax Group at 84.  Other members of the top 5 include Kohlberg Kravis Roberts at 83, ABRY Partners at 81, the Carlyle Group at 74, and BPIFrance at 66.

3MostActive Source: Pitchbook

Most Active Small Private Equity Firms

Now to the smaller firms – the most active private equity firms with less than $250 million in assets under management. This list is probably much more difficult to guess.  Here’s the look.

Interestingly (bet you didn’t guess this one), the most active small private equity investing firm in 2016 was MCapital Partners, having been involved in 22 deals.

Other members of the top 5 include Tecum Capital Management at 14, Sodero Gestion at 13, Ouest Croissance at 12, and Shore Capital Partners at 10.

Did you get any of them?

4ActiveSmall Source: Pitchbook

Last One: Top Dealmakers in the Private Equity Buyout Space

One last challenge – can you guess the top dealmakers in the private equity buyout space?  Guess now, because here’s the list.

Interestingly, on top is BPIFrance at 26.  Other top 5 2016 buyout firms include the Carlyle Group at 20, Kohlberg Kravis Roberts at 16, Ardian Holding at 16, and EQT Partners at 13.

5Buyouts Source: Pitchbook

Conclusion

There’s lot of shifting pieces in the world of private equity.  Contained herein was a look at the top private equity dealmaking firms in 2016.

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With the 2016 U.S. presidential election over, and tax reform at the top of the agenda, now seems like a good time to think about particular aspects of the incoming administration’s tax proposals.  One of ideas floated by the Trump administration is to tax carried interest.

What is Carried Interest?

Simply put, carried interest is income general partners of a private equity or venture capital fund might make for managing funds and is based upon profits earned by the funds.  Carried interest income is taxed at the lower capital gains tax rate, which has a maximum tax rate of 20% (plus the Obamacare 3.8% tax, if it applies).  The 23.8% cap is lower than the tax imposed on wage and salary income of 43.4% (the 43.4% is the sum of the top personal income tax rate of 39.6% plus the Obamacare investment tax of 3.8%).

Continuing in the vein of economic populism, Trump proposed taxing these money managers’ capital gains as ordinary income.

How Much Money is There That the Government Might Tax?

How much money is there that the federal government might get if it were to tax carried interest as ordinary income as opposed to capital gains?  The Congressional Research Service put the figure at about $17 billion over 10 years (it’s probably grown to around $20 billion over years now).  That’s a chunk of change for an industry that manages around $4 trillion in assets.

How Prevalent is Carried Interest?

With background and the amount of money at issue established, let’s address this question: how prevalent is carried interest?  Job Search Digest’s recently released 2017 Private Equity & Venture Capital Compensation Report provides some indication.  The report provides some fascinating looks at carry interest by job title, carried interest by years of experience, how the carried pool is shared, and the size of the carried pool.

The first look is what portion of the carry respondents in the survey reported.  Almost half of all respondents receive no carry at all.  This is unsurprising in one way because carry is only shared by those responsible for investment decisions and the percentage of carry is directly proportional to the years of experience and level of investment responsibility.  Still, it’s surprising to see that only around 12% of respondents receive than 10% of the carry pool.

Carry percentage

The second interesting finding about carried interest is how long it takes – measured by years of experience – for private equity professionals to get in on the carried interest action, as shown in the following graphic.  Overall, the sweet spot seems to be between 5 and 10 years before a majority of professionals have carried interest.  Interesting.

carried interest work experience

Conclusion

Overall, the Trump administration proposed during the campaign season to tax carried interest as ordinary income.  Should Trump and Congress agree on such a proposal, it would mean a tax increase of perhaps $20 billion over the next 10 years and affect a large portion of the private equity and venture capital managers.  How private equity and venture capital professionals might respond is tough to gauge, but one thing is probably certain – they will respond in some way to keep as much money away from the federal government as possible.

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The Income Tax Rate Probably Does Matter to Unicorns

January 10, 2017

Given that the Trump Administration plans on lowering the individual income tax rates and corporate income tax rates for pretty much all taxpayers, economists and other observers have been debating what type of effect this might have on economic growth (hint: the debate will never end). Within this vein of discussion on the overall effect of […]

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Which Cities are Winning in the Venture Capital Return Game?

December 27, 2016

If you work in the world of finance, return is everything, perhaps the only thing.  We decided to take a look at which cities are winning in the venture capital return game. If you’re like most, you might guess the San Francisco area – after all that’s where a large – very large – percentage of […]

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Who Are the Most Active VC Investing Firms and Corporate VC Investors?

December 12, 2016

It’s always interesting, every now and then, to take a look at who the top venture capital investing firms and corporations are. Top Corporate Venture Capital Investors Before taking a look at the top corporate venture capital investors according to VentureDeal, which companies would you guess would be at the top?  Would it be tech […]

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Is 6 Years the New Normal for Private Equity Holding Periods?

November 29, 2016

In an interesting new paper from a couple of young business school professors (Makiaho and Torstila (2016)), recent evidence from the European equity buyout universe suggests that the holding period of private equity investments has lengthened, from about 2.6 years in 2000 to about 6 years in 2015.  What’s behind the shift?  Is the shift […]

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With Donald Trump On Deck, Here are 3 Economic Indicators to Watch

November 14, 2016

With Donald Trump surprising many in his astonishing rise to the American presidency, now seems like a good time to review how the economy might perform in the coming first year of his presidency.  In what follows are three topics on the 2017 horizon, including the American consumer, business investment, and Federal Reserve interest rate […]

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5 Observations Based on the Merrill Corporation’s Most Recent Mergers and Acquisitions Survey

November 1, 2016

This week the Merrill Corporation released its most recent survey results of 30,000 Mergers and Acquisitions (M&A) professionals across the world.  Many of the findings probably aren’t all that surprising, but some might be. The Broad Infographic First Before delving into the details, here is Merrill Corporation’s broad infographic of their survey results. Shown in […]

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Do Venture Capitalists Add Value at the IPO?

October 17, 2016

It may seem like an innocuous question.  On the one hand, why would venture capital companies add value to an IPO?  Perhaps the presence of venture capital companies could drag down the value of a company’s IPO because the market could view such presence as venture capitalists attempting to exit from a “peaking” investment.  On […]

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