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Some call it "private equity inflation."
It is a problem for the industry that occurs as the market rises over a long period of time. That causes acquisition valuations to go higher, which allows private equity firms to sell or take their portfolio companies public at steeper prices.
That, in turn, puts more money into the coffers of private equity, which means there is more competition when bidding for new assets, driving prices higher yet again.
During the first quarter, private equity firms paid a median enterprise value multiple of 10.8 times earnings before interest, taxes, depreciation and amortization, according to a new report by PitchBook. That's the highest level since at least the financial crisis, the report showed.
"PE firms are victims of their own success when it comes to pricing," the report said.
Compounding their challenges (or blessings) is that it's among the best environments for fundraising ever. North American funds secured their highest first-quarter fundraising total ever, raising $62 billion, according to recent data by Preqin, an alternative assets research firm.
Despite the large amount of cash on hand, private equity saw a tick down in deal activity during the first quarter. The PitchBook report showed that 745 transactions closed during the quarter, which was a 14 percent decline from the previous three months.
One area private equity firms are putting money to work is tech. Of all the private equity deals completed during the first quarter, one-fifth of them involved companies in the information technology industry, according to PitchBook. That's compared to the 10 to 15 percent range that has existed over the last decade.
Tech companies — even ones that have never been public — are finding it beneficial to be acquired by private equity so that they can focus on their long-term growth initiatives, rather than conceding to investors with quarterly earnings and the like, according to the report.
Two of the biggest examples during the first quarter include KKR's $2 billion acquisition of Optiv Security, as well as Thoma Bravo's $800 million purchase of Planview.
While mega-deals, which PitchBook defines as having enterprise values above $2.5 billion, were a big trend in 2016, they were less so during the first quarter. Only two deals of this size were completed during the first three months (Blackstone's $6.1 billion acquisition of TeamHealth Holdings and Koch Equity Development's $2.5 billion growth equity investment in Infor), according to PitchBook.
PitchBook said it expects to see more mega-deals during the remainder of the year, as private equity has so much capital to deploy. Even if they have to pay up for it.