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M&A Targets Increasingly Backed by Private Equity

A growing number of assets owned by private equity and venture capital firms has resulted in higher levels of institution-backed merger and acquisition activity, Pitchbook reports.

  • Alicia McElhaney

A record portion of the companies acquired so far this year were backed by private equity and venture capital firms, a Pitchbook study revealed.

According to the report published Thursday by the Seattle-based data company, 16.9 percent of all mergers and acquisitions completed in 2017 as of September 30 involved target companies owned by institutions, compared to 15.5 percent of all 2016 deals.

This trend reflects the growing number of assets owned by private equity and venture capital firms, and results in more sophistication on the part of target companies, Pitchbook analyst and report author Dylan Cox explained by phone Thursday.

According to the report, 11.1 percent of target companies acquired in the first three quarters of 2017 were backed by private equity firms, up from 10.2 percent in the full 2016 calendar year.

Meanwhile, 5.8 percent of 2017 target companies were backed by venture capital as of September 30, compared to 5.3 percent in all of 2016.

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According to Cox, more companies being held by institutions has led to more companies being acquired.

“That of course is a result of increased fundraising and deal-making in the market,” Cox said.

With deal valuations at the highest levels ever tracked by Pitchbook, he said it makes sense that more institutionally-owned assets are going to market. As of the third quarter, the median deal valuation was 10.6 times company earnings before interest, tax, depreciation, and amortization – up from 10.2 times Ebidta in 2016. Deal multiples have been steadily increasing since 2012, when the median valuation was 8 times Ebidta, according to Pitchbook data.

Cox said these rising valuations are attractive for private equity and venture capital firms, making them more likely to sell portfolio companies. And the growing number of instituition-backed merger and acquistiion targets has changed the dynamics of M&A, with companies increasingly traded by “sophisticated investors” instead of individuals and families, according to the report.

“Increasingly, acquirers are dealing with professional investors on the other side of the table,” Cox said.