Private equity buyouts have enjoyed the strongest start to a year since before the financial crisis as fund managers have come under intense pressure from investors to deploy some of the record amount of capital they hold.
The volume of deals involving private equity firms climbed 29 per cent to $143.7bn in the first half of the year, the highest level since 2007, according to data from Thomson Reuters.
The sector accounted for 9 per cent of overall mergers and acquisitions activity, which reached $1.55tn.
The pick-up in dealmaking reflects an environment where private equity firms face fierce competition for assets among themselves, as well as from corporate buyers and large institutional investors.
At the same time, money continues to flood into the sector. Apollo Global Management recently raised the largest ever pure buyout fund with $23.5bn in commitments, while CVC Capital Partners hauled in €16bn from investors.
The huge sums have increased the pressure from investors for private equity firms to put the money to work. But some industry insiders and analysts are now warning about the ever higher prices that groups are paying to seal deals, adding to the challenge of generating big returns.
"Private equity groups are paying full prices for the assets and it is very much a seller's market," said Adrian Maguire, who leads the private equity team at law firm Freshfields Bruckhaus Deringer.
For instance, Bain Capital and Cinven beat competition from Advent International and Permira to strike a €4.1bn deal to buy German generic drugmaker Stada — a 49 per cent premium to the company's undisturbed price. However, the deal, which would have been Europe's largest buyout in four years, collapsed this week after the duo failed to secure sufficient acceptances for their offer.
In Europe, buyouts reached $39.7bn in the first half of this year, a 29 per cent increase from the same time a year ago and the highest level since 2014.
US private equity volumes reached $78.3bn in the period, a 43 per cent increase from last year and the most since 2013. The largest deal so far this year to take a company private was struck by JAB, the investment company backed by Germany's billionaire Reimann family, which agreed to pay $7.5bn to acquire US bakery and sandwich chain Panera Bread.
Investors have been flocking to the private equity sector as they search for higher returns in a generally low yielding market. "Public markets are incredibly expensive. The private equity asset class offers target returns of 15 per cent to 20 per cent and so it makes it an incredibly attractive place to invest," said Rob Pulford, head of financial sponsors for Europe, the Middle East and Africa at Goldman Sachs.
The high valuations for assets have also led private equity buyers to enter more complex transactions in which they extracted specific "unloved" units from corporations, according to Anthony Diamandakis, global co-head of global asset managers at Citigroup.
Recent high-profile disposals by large corporations include French energy group Engie's $3.9bn sale of its oil and gas division to a vehicle set up by Carlyle and CVC.
Mr Diamandakis said some firms prefer such transactions because the companies generally have not previously been through private equity hands, making it easier for the new owners to "drive efficiencies" aimed at improving operating and profit margins.
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