1 2016 was a substantial year for M&A industry: According to Pitchbook, PEs and VCs saw an enormous amount of fundraising and dry powder during 2016. Global dry powder in 2016 was at an all-time high of about $754bn and the average PE fund size increased over 6% to $765mn, while the median fund size increased to a decade high of $280mn. ~88% of PE funds hit their capital raising targets, which is the highest rate ever recorded. The M&A market, in general, is very cyclical in nature and is currently at one of its peaks. Despite that, some funds prefer to move downstream to find less expensive deals at smaller companies, yet the indicators show that funds with commitments under $100mn form a small part of the market space. Median EV/EBITDA multiple jumped to 11.0x for M&A transactions in the USA, partially driven by competition amongst strategic acquirers and PE firms. Add-ons made up 64% of the buyout activity last year, which is one of the highest levels ever recorded. With respect to deal closure time, it took on an average of 6 months to close a deal across multiple sectors.
2 High capital flow in Insurance Sector: Multiples are at an all-time high with TAG Financial selling an agency in 2016 for 12.0x EBITDA up from ~6.0-7.0x in 2012. Pure acquisition strategies of insurance brokerages, especially in the Property & Casualty (P&C) sector, are progressing because 92% of people renew their insurance over and over again. Obamacare alternatives were growing, but now have difficulty retaining growth  in Trump’s administration, while self-funded plans are experiencing a rise. There are capital requirements for insurance carriers driven by the lack of regulatory capital, leading to high capital flows in P&C and Reinsurance sub-sectors. The M&A activities will continue to grow in in 2017, given the volatility in the sector.
3 Solid Waste Sector has a high degree of optimism for 2017: In 2016, the industry had about $50bn of annual revenue. In this business, there are three big players that control 45% of the market: Waste Management, Republic, and Waste Connections. About 35% of the market belongs to privately owned companies and the balance 20% is municipal. Solid waste companies are valued at about 8.5x EBITDA as compared to 6.5x two years ago. The Hazardous Waste business had $7bn of activity in 2016. Two major companies in this sector are Clean Harbors and US Ecology. Hazards and industrial waste are a strong part of new Environmental Protection Agency regulations. “One of the reasons for regulations is that a lot of owners of the privately-owned companies are second-generation wealthy people who want to retire and whose kids don’t have an interest in the sector,” said John Quirk of Cronus Partners LLC. Even public utilities and old non-functioning power plants need to be cleaned up and cost a few million dollars. Back in 2008, TVA Kingston Fossil Plant in Tennessee had a spill, which cost them between $675mn and $975mn. There is a lot of activity in this sector and the global factors don’t affect the industry much. A lot of $50mn deals are coming out this year. Growing regulatory complexity and aging infrastructure will continue to drive the demand for these services.
4 PE acquirers are competing aggressively for consumer space: Dollar Shave Club was acquired for $1bn by Unilever and IT Cosmetics for $1.2bn by L’Oreal. These companies are relatively young and are yet to return profits. PE companies are very aggressive in competing with its strategic counterparts. A high-growth brand’s valuations are often based on revenue as supposed to EBITDA. Previously in the grocery store, finding the next brand, good shelf space, and center aisle was the main focus, while today, the brands around on the perimeter of the grocery store are the assets to look out for. Traditional retailers are eying technology companies to improve their in-store experience and value proposition. Increased focus on health and wellness is expected to fuel activity in the Food & Beverage sub-sector.
5 The Technology Sector has a lot of new entrants: The valuations for this sector are based on Revenue multiple as opposed to EBITDA. The biggest deal last year was the acquisition of Cvent by Vista Equity Partners for 7.1x Revenue. Software, as a sector, has a Revenue multiple of 4.0x. There is a scarcity in the supply chain in terms of selling companies in other sectors–a lot are shifting to tech. The strategic acquirers are buying innovative companies in the sector. There are two phases for the M&A activity in the technology sector: (1) A lot of money was invested into Cloud, SaaS and mobile three to five years ago, and the mature companies are now being sold. (2) New sectors like Artificial Intelligence, Virtual Reality, Analytics and Network Security are emerging where the capital is employed and will be harvested in next two to three years. Currently, Artificial Intelligence is the best bet in this sector.

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