Private equity firms are investing in smaller deals and exercising caution with larger deals, according to new data from Private Equity Info’s M&A research database.
Although platform acquisitions by private equity firms are down substantially in 2024, our data shows that the share of deals that are under $50 million have become the focus in 2023 and the first half of this year.
The sentiment seems to be: “If acquisitions are a mistake in this season, then make them small.”
This represents a shift back to pre-pandemic trends when smaller transactions were a larger percentage of acquisitions, before firms started acquiring larger portfolio companies as a result of a boom created from the economic stimulus.
When evaluating the ratio of platform investments-to-exits, segmented by typical deal size from 2017 to June 2024, private equity firms focused on smaller deals are still active acquirers, while the firms that typically invest in mid-, large-, and mega-sized deals are showing significant reductions in acquisitions.
For the purpose of this study, deal sizes are determined by enterprise value ranges. Small deals are under $50 million; mid-sized deals are between $50 and $250 million; large deals are between $250 and $500 million; and mega-sized deals are more than $500 million.
For background, the private equity industry is growing in aggregate when the ratio of investments-to-exits is greater than one and contracting when the ratio is less than one. For the last 20 years, investments have outpaced exits as the private industry has expanded.
In 2018, private equity firms that typically invest in smaller deals made 3.3 platform acquisitions for every exit, while mid-, large- and mega-sized deals made 2.3 – 2.7 acquisitions for every exit.
From 2019 through 2021, there was more growth in large transactions, as the pace of smaller deals declined. However, a reversal started in 2023 as private equity firms reverted to a focus on smaller deals again, which is especially acute considering exits are down significantly as well.
In the first half of 2024, small deals grew at a rate of 2.5 investments for every exit, while mega deals grew at 2.1 investments for every exit (down from its peak of 3.3).
The difference of approach between the periods is clear.
From 2015 to 2020, there was a strategic advantage in pursuing smaller deals, with less buyer competition and lower valuation multiples. Acquiring smaller companies presented a better value proposition with higher potential return on investment as the upper-end of the market became more competitive.
Over the past year-and-a-half, with the government stimulus invested, higher interest rates, and a higher inflationary environment, private equity firms are now deploying capital more cautiously.
The graph below rearranges the same data grouped by deal size, to show how the private equity industry is growing in aggregate. The deal size mix changes over time, and for different reasons.
A surge of available funds in 2021 led to a greater deployment of capital in mega deals. Now, macroeconomic events are driving firms back to smaller platform and add-on acquisitions.
