PE Investments / Exits Ratio – Data Study
Using our M&A research database at www.PrivateEquityInfo.com, I studied private equity investments and exits for the years 2015, 2016 and 2017.
The ratio of the number of PE (Investments / Exits) over time, sliced by deal size shows a significant industry trend – private equity firms moving down market to focus on smaller deals.
When the ratio of (Investments / Exits) = 1, private equity firms (in aggregate) are making one investment for every exit. This would be the “no growth” scenario. When the ratio is above 1.0, the private equity industry is a net acquirer of portfolio companies. This is the “growth” scenario.
For PE firms focused on Mid-, Large- and Mega-sized deals in 2015 – 2017, the (Investments / Exits) ratio was consistently about 2-to-1. Overall, private equity firms in these segments have been net acquirers of businesses over the past three years at the pace of roughly two portfolio company investments for each exit. This is no surprise as most people intuitively know private equity firms have become more prominent in recent years.
Size Ranges Defined (by Enterprise Value)
Small $0 – 50 million Mid $50 – 250 million Large $250 – 500 million Mega $500+ million
The same ratio for the PE firms focused on Small deals clearly illustrates that private equity has made a huge push into the lower middle market over the last two years. In the Smaller deal segment of the market, PE firms collectively made about 3-to-1 investments over exits in 2016 and 2017, compared to 2.3-to-1 in 2015.
The chart below is the exact same data, but with the bars re-arranged to group the years together.
While I have previously written about the push down market, I believe these charts best illustrate the trend in that there are two bars distinctly higher than the others.
Uncertainty in the Data
As with most data studies, the data is inexact. So, I want to spend a few paragraphs to explain why the bars in the charts above are likely a bit overstated (taller than reality); and to argue that, nevertheless, it’s the relative size of the bars that shows the trend.
The portfolio company investments and exits data used to calculate the ratios in the charts above contain some uncertainty that would tend to make the ratios slightly overstated. There are two primary reasons for this:
- To calculate the investments/exits ratio, I only included portfolio companies where we had a known investment or exit date (obviously). The ratios shown are likely a bit overstated simply because our internal research team is more likely to discover acquisition dates compared to exit dates. This is especially apparent in cases where portfolio companies experienced negative events (bankruptcy, lawsuit or other negative outcomes) that discouraged PE firms from fully associating with the portfolio company and therefore not announcing the ultimate exit. The estimated uncertainty for this is shown in the lighter shaded portion of the bars in the graphs above.
- I only included private equity firms that are still in business (as of Feb. 2018). The data would therefore exclude any private equity firms that were winding down in 2015 – 2017. Although a small percentage, these firms would have had more exits than investments with a net effect of lowering the ratios presented above. Although it would be difficult to quantify this, I suspect the effect is quite small.
Although these are limitations of the study, it is reasonable to assume overstatements in the ratios would be fairly uniform across all deal sizes (that is, all the bars should be approximately equally overstated). Because it is the relative size of the bars that is most useful in identifying trends, I believe the conclusion is still valid – that the private equity firms made a significant push to the lower end of the market with their thesis that this would allow them to capture more attractive deals in a less competitive environment.