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Credits & ContactPitchBook Data, Inc.
JOHN GABBERT Founder, CEO
ADLEY BOWDEN Vice President,
Market Development & Analysis
Content
NIZAR TARHUNI Senior Analyst
DYLAN COX Analyst
BRYAN HANSON Data Analyst
JENNIFER SAM Senior Graphic Designer
Contact PitchBook pitchbook.com
RESEARCH
EDITORIAL
SALES
COPYRIGHT © 2017 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems—without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.
Introduction 4
Overview 5-6
Deal Multiples & Debt Levels 7
Q&A: Merrill Corporation 8
Deals by Size & Sector 9
Exits 11-12
Fundraising 13-14
League Tables 15
Contents
The PitchBook PlatformThe data in this report comes from the PitchBook Platform–our data software for
VC, PE and M&A. Contact [email protected] to request a free trial.
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IntroductionKey takeaways
» Pricing stifles private equity deal flow in 2016
» Heightened company inventory limiting available targets while also raising
suspicion around portfolio company quality
» Tech and energy investment experience growth
» Median equity contributions jump to 5.4x EBITDA
» More managers than ever before hit their fundraising targets in 2016
If 2014 was a record-setting year for PE, and 2015 a turning point, then 2016
can be characterized as the first step toward normalcy. Buyout activity receded
amidst the growing concerns about global trade, rising populism and central
bank policies that we know all too well. It must be noted, however, that PE
transactions occur on a deal-by-deal basis, not a global basis. As such, managers
have continued to find pockets of growth and opportunity, particularly in the
tech and energy sectors.
In today’s tough environment, many large corporates have resorted to competing
with PE firms, thereby pushing up multiples and squeezing out any margin for
error. Due diligence and deal sourcing have become as important as ever before,
and firms will have to become more creative in the ways they produce alpha and
hedge against any downside.
PE exits and fundraising also fell in 2016, though more managers are meeting
their stated fundraising goals. As we look to the coming year, we expect more
of the same in terms of deal flow, but a more competitive environment could
drive down returns and prompt some hesitation around future allocations toward
the asset class. In the end though, the best managers will continue to garner
outsized contributions and return sufficient capital to their partners.
We hope this report is useful in your practice. Please feel free to contact us at
[email protected] with any questions or comments.
DYLAN COX
Analyst
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4 PITCHBOOK 2016 ANNUAL US PE BREAKDOWN CO-SPONSORED BY
Transaction value stays highOverview
Deal value remained robust
$649 billion in PE transactions were
completed across 3,538 deals last year,
representing 12% and 14% year-over-
year decreases, respectively. As we
noted throughout the year, the falling-
off can be mostly attributed to both an
expensive market and a lack of quality
acquisition targets. Median EV/EBITDA
for M&A transactions (including
buyouts) in the US this year hit 10.9x,
nearly a full turn higher than 2015’s
10.0x and far above the 7.9x figure we
recorded in 2010.
Strategic competition here to stay?
These higher multiples were caused
in part by competition from strategic
acquirers, which continues to
hamstring PE dealmaking. At the
time of this writing, the S&P 500 was
trading at a price-to-earnings ratio
of approximately 26, compared to
a post-financial-crisis low of about
13.5 in September of 2011. That is, on
average, a company in the S&P 500
has about double the purchasing
power now, denominated in their
own stock, as they did five years ago.
Further, this multiple expansion also
re-emphasizes the pricing level at
which PE has to play at today, thus, it’s
no wonder that PE firms are feeling
some of those side effects. In 2017,
we’ll be keeping a close eye on public
company valuations and their effect on
PE pricing.
Lack of buyout targets
In any given sector or geography,
there are a finite number of companies
that can reasonably service the debt
loads necessary for producing the
returns that buyout producers expect.
An expensive market contributes to declining activity amid high value
US PE activity
Source: PitchBook. Unknown deal values are estimated based on known figures.
$513
$905
$366
$165
$357
$422
$477
$512
$650
$737
$649
2,813
3,486
2,732
1,845
2,7103,036
3,423
3,321
4,098 4,131
3,538
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Deal Value ($B) # of Deals Closed
US PE-backed company inventory
1,5181,699
1,9312,260
2,6233,043
3,6054,206
4,7114,923
5,2525,570
5,9236,201
6,5446,912 7,168
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2011-2016
2006-2010
2000-2005
Pre-2000
Year of Investment
Source: PitchBook
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Add-ons retain a commanding proportion
US add-on % of buyout activity
At the end of 2016, there were 7,168
PE-backed companies in the US, a 46%
increase from the 4,923 companies
in 2009. This has left investors with
limited quality options for putting
capital to work. Not to say that the US
economy is by any means saturated
in terms of financial sponsorship, but
opportunities will become harder to
find if the pace of capital investment
continues to exceed economic growth.
Add-ons keep adding up
With prices as high as they are, it has
become imperative for firms to use
buy-and-build strategies in order to
blend multiples and create a lower
aggregate pricing for their portfolio
acquisitions. In addition, managers
can utilize this strategy to ensure
a higher exit price as they build a
more comprehensive business. Add-
ons made up 64% of buyout activity
last year, up from 61% in 2015 and
the highest proportion we’ve ever
recorded. As this trend continues to
play out, deal sourcing will become
even more important and single-
platform operational improvements
will be expected at the bare minimum.
Most notably, there were 283 add-
ons in the healthcare industry,
which continues to see increased
consolidation amidst speculation
about potential changes to the
Affordable Care Act.
IT out-computes the rest
The tech sector saw more investment
from PE firms in 2016 than it did at
any time in the last 15 years. 567
deals were completed, worth a total
of $159.8 billion. Granted, $60 billion
of that sum can be attributed to the
Dell/EMC take-private that closed in
September. But even excluding that
transaction, PE investment in the IT
sector would have grown by 10.8%
this year. As more venture-backed
companies stay private for longer
amidst a sluggish VC-backed exit
market, we see an opportunity for PE
investors to step in and help provide
liquidity for aging venture portfolio
companies. Further, we believe the PE
operational and management model
is well-suited for already established
and fast-growing companies, and the
ability to enter transactions as patient
capital will also allow PE sponsors
to move such companies through
lucrative exits down the road.
Energy
PE investors purchased $55.8 billion
worth of energy companies in 2016,
up 31% from the prior year. It seems
as though investors are finally getting
used to $50-a-barrel oil and that
the gap between buyer and seller
expectations for the future of industry
has narrowed. Supporting the truism
that necessity is the mother of
invention, many E&P companies are
finding new ways to stay profitable
in the low oil-price environment.
Lastly, all signs from the incoming
administration point to deregulation in
the industry, which could spur a new
wave of investment activity.
1,11
1
1,33
2
1,50
4
1,41
5 1,85
5
1,92
2
1,71
9
938
993
1,16
3
952
1,17
7
1,20
9
963
54%
57%56%
60%
61% 61%
64%
2010 2011 2012 2013 2014 2015 2016
Non Add-on Add-on Add-on % of Buyout
Source: PitchBook
Boom in IT deal value
US PE activity in IT & energy
210213
551 567
0
100
200
300
400
500
600
$0
$50
$100
$150
$200
$250
2010 2011 2012 2013 2014 2015 2016Energy Deal Value ($B) IT Deal Value ($B)
# of Energy Deals Closed # of IT Deals ClosedSource: PitchBook.
Unknown deal values are estimated based on known figures.
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Pricing pressures take tollDeal multiples & debt levels
Frothy valuations, few opportunities
As previously mentioned, median
enterprise value surged to 10.9x
EBITDA for M&A transactions
(including buyouts) this year.
Pricing pressures came from the
aforementioned strategic acquirers, as
well as competition amongst PE firms,
which have a collective $852 billion in
dry powder globally. Meanwhile, many
of the obvious buyout targets have
already been acquired, and the US
remains an attractive target for foreign
investors searching for both yield
and security. In short, there are too
many dollars chasing too few feasible
investment opportunities. To stay
competitive, firms will have to focus
more on deal sourcing. As the old
saying goes, “You make your money
when you buy, not when you sell.”
Equity contributions on the rise
For those deals that are completed
(and there are still plenty), firms are
being forced to use more equity
as a percentage of the total deal
value. Median debt percentage for
PE buyouts and M&A in the US fell
to just 50.5% of enterprise value this
year, a rather dramatic decrease from
the 56.8% observed last year. Money
center banks are limited to lending
at no more than 6.0x EBITDA, and
many nontraditional lenders are either
unable or unwilling to underwrite
loans at such high valuations, given
the bifurcation we’ve seen in company
quality. Thus, the equity contribution
becomes a larger slice of the pie. The
median equity/EBITDA ratio jumped
more than a full turn to 5.4x this year.
Less leverage will make outsized
Median EBITDA multiples of US M&A (including PE buyouts)
Median debt percentages for US M&A (including PE buyouts)
4.6x 5.
2x
4.5x 5.
4x
5.2x 5.7x
5.5x
3.4x
4.0x
3.6x 3.
5x 4.1x 4.
3x 5.4x8.0x
9.1x8.1x
8.9x9.3x
10.0x10.9x
2010 2011 2012 2013 2014 2015 2016
Debt/EBITDA Equity/EBITDA Valuation/EBITDA
56.8%
50.5%
40%
45%
50%
55%
60%
65%
2010 2011 2012 2013 2014 2015 2016
Source: PitchBook
Source: PitchBook
PE returns harder to produce, but
companies with less debt on their
balance sheets will be more equipped
to weather any potential downturn.
In order to complete deals in a timely
manner, investors will have to pay cash
up front and depend on financing
post-close.
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How would a rise in interest rates
affect the financing packages
available to PE investors?
Not as much as you would have
thought back when the “taper
tantrum” was fresh in everyone’s
memory. Since its move was
telegraphed throughout the year, the
Fed’s decision was hardly surprising
and consequently fund managers and
lenders were prepared to price in an
increase. That said, investors will do
well to plan for subsequent increases
by maintaining intensive scrutiny of
prospective targets, keeping close
watch on the ability of some of their
pricier recent acquisitions to service
debt loads, and continuing to utilize
nonbank mid-cap lenders that employ
select syndication on deals to minimize
execution risk.
We saw PE EBITDA multiples grow
even higher in 2016. Do you think the
current pricing is sustainable from a
returns standpoint?
In a few cases the pricing will turn
out to be sustainable or worthwhile.
However, it will be a tall order for
many fund managers to ensure that
the high prices they paid recently
end up being worth it. There are ways
and means to do so, all of which take
considerable time and effort, which is
why we’ve been hearing more about
lengthening fundraising cycles and
investment timelines in limited partner
agreements plus observing decreasing
buyout activity. Some firms will be able
to handle these adjustments sooner
than others, while all would do well to
emphasize the long term to their fund
investors.
Richard A. Martin, Jr. Senior Director
Merrill Corporation
Richard A. Martin, Jr. is a Senior Director at Merrill Corporation, responsible for Merrill DataSite’s global marketing group. His 18 years of marketing experience working and residing in the US, U.K. and Europe has developed Martin’s understanding of disparate business cultures and the global financial industry, evidenced by a successful record of growing businesses. Martin currently works closely with financial professionals to provide first class virtual data room (VDR) solutions for their transaction and due diligence needs. Prior to joining Merrill, Martin led the hedge fund marketing strategy group at Morgan Stanley Capital International and the global equity product strategy group at Reuters International, London. He received his B.A. from Dartmouth College, a marketing certificate from the University of Michigan Business School and currently resides in New York City with his wife and children.
If the Affordable Care Act is repealed
or replaced, how will that affect PE
investors in the healthcare sector?
There are still stable and growing
healthcare needs. The bigger question
mark is around the significant growth
of the number of insured within the
US. Those PE firms that targeted
acquisitions looking to capitalize on
expansion of coverage to underserved
populations or similar population
growth will have to take repeal into
account, but as there would be
significant political costs from taking
away insurance policies without some
type of replacement offered that could
end up being effectively similar, it is
still definitely a waiting game. Frankly,
the typical challenges of investing
in healthcare are still PE managers’
primary concerns.
Secondary buyouts made up a larger
portion of PE-backed exits this year.
Do you expect this trend to continue
in 2017?
Yes in terms of proportion, not
necessarily in terms of actual counts.
PE firms will still be looking to either
execute a rapid sale of their best-
positioned portfolio companies while
valuations remain high or further
optimize their portfolios by offloading
businesses with which they’ve done as
much as they could to more specialist
PE managers. Obtaining liquidity will,
of course, always remain a consistent
driver, and in light of slowly declining
M&A plus the choppy IPO market,
there only remain so many other
means of sale.
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8 PITCHBOOK 2016 ANNUAL US PE BREAKDOWN
Mega-deals spiked IT’s total
US PE deals ($B) by sector
IT remained strong
US PE deals (#) by sector
Core and lower middle markets were robust
US PE deals (#) by deal size
High valuations led to preponderance of large deals
US PE deals ($B) by deal size
0 1,000 2,000 3,000 4,000 5,000
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016Under $25M
$25M-$100M
$100M-$500M
$500M-$1B
$1B-$2.5B
$2.5B+
$0 $200 $400 $600 $800 $1,000
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016Under $25M
$25M-$100M
$100M-$500M
$500M-$1B
$1B-$2.5B
$2.5B+
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2010 2011 2012 2013 2014 2015 2016
B2B
B2C
Energy
FinancialServices
Healthcare
IT
Materials &Resources
$0
$100
$200
$300
$400
$500
$600
$700
$800
2010 2011 2012 2013 2014 2015 2016
B2B
B2C
Energy
FinancialServices
Healthcare
IT
Materials &Resources
Source: PitchBook
Source: PitchBook.
Unknown deal values are estimated based on known figures.
Source: PitchBook. Unknown deal values are estimated based on known figures.
Source: PitchBook. Unknown deal values are estimated based on known figures.
Outliers drive disparitiesDeals by size & sector
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Exit value historically strongExits
There were 1,097 PE-backed exits
in 2016, totaling $316 billion, which
represent 18% and 22% YoY decreases,
respectively. That the exit markets
took a nosedive this year comes as
a bit of a surprise, given the high
multiples we’ve seen lately. This leads
us to believe that the current quality of
assets in many PE portfolios may not
be able to justify a sale in the current
high-multiple environment.
There were just 32 PE-backed IPOs
in the US this year, the fewest since
2009. Stock market performance
back in 2015 was the worst we’ve seen
in any year since the financial crisis.
Thus, many companies planning on
2016 debuts decided to postpone
their plans when the markets went
south at the end of 2015. These IPO
processes, which take months to plan
US PE-backed exit activity (#) by type
Source: PitchBook
US PE-backed exit activity
and execute, were only put back into
place once markets recovered in the
first two quarters of the year. 21 of the
32 PE-backed IPOs this year occurred
in the back half of 2016, with sponsor-
backed companies like Invitation
Source: PitchBook
0
50
100
150
200
250
300
350
400
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2011 2012 2013 2014 2015 2016
Corporate Acquisition IPO Secondary Buyout
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$164
$237
$115
$57
$153
$167
$229
$226
$298
$406
$316
740
908
629
415
800889
1,090 1,014
1,2651,338
1,097
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Exit Value ($B) # of Exits
Source: PitchBook
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Corporate Acquisition
IPO
Secondary Buyout
Source: PitchBook
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013 2014 2015 2016
B2B
B2C
Energy
FinancialServices
Healthcare
IT
Materials &Resources
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013 2014 2015 2016
B2B
B2C
Energy
FinancialServices
Healthcare
IT
Materials &Resources
Source: PitchBook
Source: PitchBook
Homes (Blackstone Group) and YETI
Coolers (Cortec Group) currently in
registration. With IPO markets cold
for part of the year and a greater
number of PE firms in the market, PE
investors became more likely to sell
to other financial buyers. 47% of PE-
backed exits in 2016 were secondary
buyouts, compared to just 32% in
2009. Strategic acquirers, however,
still dominate the market. Sales to
strategic acquirers made up 73% of
PE-backed exit value in 2016.
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Energy exits plummet in value
US PE-backed exits ($B) by sector
Consumer saw a relative increase
US PE-backed exits (#) by sector
M&A continues to drive majority of exit value
US PE-backed exits ($B) by type
Persisting at a high level
Median US PE-backed exit size ($M)
$225.0$218.0
$0
$50
$100
$150
$200
$250
$300
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
LP interest remains healthyFundraising
PE commitments ebb
252 PE vehicles closed on $180.2
billion worth of commitments in
2016, representing 11% and 10%
YoY decreases, respectively. The
decrease, which more or less mirrors
the downturn in deal flow this year, is
indicative that limited partner interest
in the asset class is still strong, but has
receded since the highs of 2013-2015.
Larger funds outraise
One major theme we noticed in 2016
is the relative success that larger
funds experienced. Median buyout
fund size increased to $250 million
this year—up from $202 million in
2015—and the highest figure we’ve
recorded since 2010. Further, smaller
vehicles have become a smaller
part of the marketplace. Funds with
commitments under $100 million fell
to just 32% of final closes this year—the
smallest percentage since 2009. The
Capital raised stays strong
US PE fundraising
Source: PitchBook
$184
$272
$181
$121
$71
$88
$110
$201
$195
$200
$180
269
311
262
161158
189202
294318
283
252
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Capital Raised ($B)
# of Funds Closed
Fund sizes tick back upward
Average & median US PE fund size ($M)
$797.4 $816.8
$202.0 $250.0
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Average Buyout Fund Size ($M)
Median Buyout Fund Size ($M)
Source: PitchBook
causes here are twofold: First, some
LPs are simply choosing to work with
fewer GPs in an effort to decrease
administrative costs and increase
negotiating leverage when it comes
to fees. Second, the more established
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013 2014 2015 2016
$5B+
$1B-$5B
$500M-$1B
$250M-$500M
$100M-$250M
Under $100M
Capital concentrates in larger funds
US PE funds ($B) by size
Source: PitchBook
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US PE funds (#) to hit target
Time between funds soars to decade high
US PE fund time metrics (months)
5.86.6
5.97.3
14.6
14.414.3
16.2
0
3
6
9
12
15
18
21
24
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Average Time Btwn Buyout Funds
Average Time Btwn All PE Funds
Average Time to Close Buyout Funds
Average Time to Close All PE Funds
Source: PitchBook
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Hit Target
Missed Target
Source: PitchBook
managers raising the largest funds
are perceived by many to have more
expertise and capital flexibility in case
of a macroeconomic downturn, so LPs
are more comfortable contributing to
those funds. In addition, larger funds
may benefit from the luxury of having
first pick over the plethora of deals
coming across their desks.
With these larger funds, we would
expect it to take slightly longer, on
average, to reach a final close. While
that did happen across all of PE, the
average time to close for all buyout
funds actually decreased to 14.4
months. Meanwhile, the average time
between funds jumped to 7.3 years—a
decade high. As new managers
continue to compete for LP dollars,
we suspect that IR teams have created
more robust and targeted processes
to cultivate existing and new LP
relationships ahead of fund launches, a
factor that could be contributing to the
increased time period between funds.
Points of strength
In a sign of health for the industry,
89% of funds hit their stated target
this year, exceeding any other year
in at least the last decade. Even
more impressive is that just 70% of
First-time US PE funds as % of all US PE fundraising
6.0%
10.3%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
First-time US PE funds' % of all US PE funds
Source: PitchBook
managers hit their targets at the
peak of the last fundraising bonanza
in 2007. That so many managers are
meeting their goals speaks to the
continual demand that LPs have for
the asset class.
Another positive indicator is that
10.3% of funds to close this year
were by first-time managers. That’s
up from a bottom of 4% in 2013,
but still well below the 30% we saw
in 2003 (though the industry was
much less developed then). The deal
boom of the last couple years has
given plenty of PE professionals the
requisite experience to run their own
shops, while the simultaneous boom
in PE fundraising has given them the
confidence to go it alone.
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League tables4Q 2016
HarbourVest Partners 19
Audax Group 18
ABRY Partners 12
AlpInvest Partners 11
Genstar Capital 10
Hellman & Friedman 10
GTCR 8
Maranon Capital 8
NewSpring Capital 8
Kohlberg Kravis Roberts 7
Advent International 6
AEA Investors 6
GoldPoint Partners 6
H.I.G. Capital 6
Kelso & Company 6
Providence Equity Partners 6
The Carlyle Group 6
The Riverside Company 6
Vista Equity Partners 6
Aquiline Capital Partners 5
Charlesbank Capital Partners 5
First Reserve 5
Great Point Partners 5
Leeds Equity Partners 5
LLR Partners 5
Oaktree Capital Management 5
Onex 5
The Sterling Group 5
Warburg Pincus 5
Most active investors by deal count Select PE deals among top 10 in 4Q 2016
Source: PitchBook
Company Investor(s)Deal Size ($B)
Sector
Talen Energy Riverstone Holdings $5.2Energy Production
Rackspace USApollo Global Management, Searchlight Capital Partners
$4.3Systems & Information Mgmt
Lexmark InternationalLegend Capital, Pacific Alliance Group, Apex Microelectronics
$4.0 Computer Parts
Vertiv Platinum Equity $4.0Electrical Equipment
inVentiv Health Advent International $1.9Healthcare Services
Fund ManagerCapital Raised ($B)
Fund Type
Highbridge Principal Strategies HPS Investment Partners $6.6 Mezzanine
Dover Street IX HarbourVest Partners $4.8 Secondaries
Carlyle Global Partners The Carlyle Group $3.6 Buyout
Vista Foundation Fund III Vista Equity Partners $2.8 Buyout
L Catterton VIII L Catterton $2.8 Buyout
Source: PitchBook
Select PE funds among top 10 in 4Q 2016
Source: PitchBook
Company Seller BuyerDeal Size ($B)
Dematic GroupAEA Investors, Ontario Teachers’ Pension Plan
KION Group $3.3
Acrisure Genstar CapitalABRY Partners, management
$2.9
DeltekThoma Bravo, Quilvest Private Equity, Prospect Capital
Roper Technologies
$2.8
CAMP Systems International GTCR Hearst $2.0
Sensus USAThe Jordan Company, Goldman Sachs Merchant Banking Division
Xylem $1.7
Select PE exits among top 15 in 4Q 2016
Source: PitchBook
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