In recent quarters we have exposed the hyperbole of doom and gloom evidence, while expecting a first quarter 2018 double digit stock market correction. We have shown that the stock market margin debt ratio is normal, credit card and mortgage default rates are great, credit spreads, junk bonds, yield curves and inflation risks are calm. Adding to the positive backdrop in this economic expansion is the massive sideline liquidity in search of corporate assets as well as shares of stock.
Global mergers and acquisitions (M&A) had their best start ever in 2018, totaling $1.2 trillion as the value of M&A deals increased 67% year over year. M&A volumes doubled in Europe in the first quarter, while the United States was up 67% and Asia increased by 11%. Excess cash, U.S. tax reform and faster economic growth in Europe has unleashed the urge for dealmaking. Private equity firms have enjoyed strong managed asset growth, hitting a record $2.5 Trillion. This excess liquidity in a low inflation world of easy credit bodes well for stocks and underlying multiples until the global economy overheats.
While a record $1.7 Trillion in PE cash is piling up on the sidelines, aggregate deal values are significantly lagging, 42% behind levels of 10 years ago. Global buyouts by private equity firms hit $440 billion in 2017 with a hefty 11 multiple, while the number of quality targets decreased due a very competitive atmosphere. Add-on deals, whereby PE firms acquire companies to bolt-on to existing portfolio companies (buy-and-build stratagems) are part of the effort to utilize the funds and generate the return investors demand. While China dominates the target list, Europe and the US have struggled to expand their deal making supply of candidates commensurate with demand. The money is calling around the world, but struggles to find enough people to pick up the phone.
The increasing level of dry powder, coupled with investor expectations pressures PE firms to make timely investments, which ups risk and valuation multiples. With too many dollars chasing too few goods, valuations will remain elevated in 2018. These higher multiples will drive the trend of adding value to single deal or a add-on platform focusing more resources on operational expertise.
