A Record Year for Private Equity Buyouts

January 26, 2015

Pitchbook is out with initial estimates on the number of venture capital exits via private equity buyouts in 2014. Perhaps surprisingly, the figures show some incredible strength.

Initial estimates put the number of private equity buyouts via venture capital exits at 138, an increase of about 25 percent from 2013. Private equity purchases via venture capital exits have been on a consistent growth path since bottoming in 2009 at around 40.

Since 2009, the sole year of weakness (on a year-over-year basis) occurred in 2013, with venture capital exits via private equity buyouts declining slightly from 2012.

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What’s Behind the Jump?

Pitchbook’s data showed a broad range of reasons for the strength, including reasonable valuations, sector-specific strength, low interest rates, and availability of investable capital.

Overall, based on early readings, private equity firms were somewhat shy of the rising valuations in 2014, which seemed to shift the industry’s focus more towards the lower to core middle market, a place where venture capital firms typically reside. With the strong growth trend from 2009 to 2014, the question arises – will it continue?

Initial indications are yes, although there is growing uncertainty about how the global economy is going to affect private equity’s desire to continue certain types of buyouts. There is also a concern that the industry may develop an expectation that valuations are too strong, and will therefore wait until valuations become more favorable.

With this as the background, projections for 2015 have the number of buyouts via venture capital exits expanding from the 138 to around 150. Most of the growth is anticipated to show up in the information technology and health care industries, the two areas with the greatest growth over the past five years.

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What Could Derail Continued Strength Beyond Simply Concern About the Economy?

It’s understood there is a lack of confidence in the strength of the global economy. What other risks are out there that could derail continued strength in the activity of private equity buyout firms?

Well, of the many potential surprises – including policymaking, war, and other geopolitical surprises – rising interest rates are probably the biggest risk to confidence. If interest rates start to rise – and they might if the Federal Reserve has its way – private equity buyouts via venture capital exits may become less profitable, which might push off dealmaking until there’s an expectation that interest rates are again close to bottom.

Conclusion

Overall, 2014 was a year of record private equity buyouts via venture capital exits, with total buyouts of this type up almost 350 percent since bottoming in 2009. Behind the strength is a growing economy and reasonable valuations in select sectors.

Initial indications are that 2015 will continue the upward momentum, although there is growing concern about how the global economy might affect private equity’s confidence in venture capital-backed businesses, particularly those in the lower to mid-tier.

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