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Competition Intensifies for Middle-Market Private Equity Deals

February 27, 2017, 07:17 AM
Filed Under: Economic Commentary

Private equity fund managers targeting the middle market are experiencing increased competition for deal opportunities, a new report from Prequin finds.

According to Preqin’s Private Equity Fund Manager Outlook for the first half of 2017, robust activity in the middle market has injected a large amount of capital into the dealmaking market and is putting pressure on fund managers to compete for attractive deal opportunities.

The survey of 400 private equity fund managers found that 51% of fund managers said they saw more competition for mid-market assets compared to the same period last year.

"Record distributions in recent years have driven investor appetite for private equity, with more fund managers coming  to market in order to meet this demand," said Christopher Elvin, Head of Private Equity Products. "Strong fundraising has injected a large amount of capital into the marketplace,  and with record numbers of fund managers vying for the best deal opportunities, it is unsurprising that competition for  assets is rising, driving up valuations."

"Fund managers operating in this space will have to work harder than ever in order to find attractive deal opportunities, and to avoid entering into bidding wars that drive asset prices yet higher," Elvin added.

Analysts attribute the competitive environment to increased demand for capital to fund buy-out deals. According to Prequin, in 2016, 48 mid-sized buyout funds rasied a total of $41 billion to fuel takeover deals -- a post-recessionary record. The study found that 58% of respondents feel that mid-market buyouts represent the best opportunities, which is more than twice the proportion that cited any other fund type or size.

Meanwhile, the low interest rate environment has reduced the cost of borrowing, with 85% of firms surveyed saying that terms of debt financing for private equity investments have remained the same or improved over 2016.

"While pricing remains a very real concern, fund managers have record levels of capital available to them, and our survey results indicate that many are looking to increase the amount of capital they deploy over the next 12 months," Prequin said.

Read the report in its entirety here.

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