U.S. private equity buyout funds with less than $500 million under management set record-highs in 2017 for total deal value, add-on deal value and deal exit value, according to a recent report. U.S. buyout funds with $500 million to $1 billion set records for total exit value and also fundraising.

The Akerman Perspectives Report, written by the Akerman law firm and based on data from PitchBook, also found near-historical highs in several other categories for sub-$500 million U.S. buyout funds in 2017, including number of deals and add-on deals closed, number of closed exits and fundraising.

“In today’s market environment, PE fundraising and transaction volumes have maintained healthy levels, thanks to a host of favorable market dynamics,” says Carl Roston, co-chair of Akerman’s corporate practice group. “Factors driving this PE activity include low interest rates, a growing economy, the reduction in marginal federal income tax rates, the relative outperformance of domestic middle-market private equity compared to other asset classes, benign credit markets and the rebalancing of portfolios by institutional investors.”

Highlights for the lower end of the middle market (funds below $500 million) include:
• A record $20.2 billion was invested in 2017 via 662 transactions, up from $17.9 billion in 2016.
• A total of 363 add-on deals were done in 2017—55 percent of the total deal activity—worth a total of $5.9 billion, a record.
• Nearly $84 billion worth of capital was realized in 2017 from exits, almost double the $48.2 billion exited in 2016 but down from the 2015 peak.
• About $16.7 billion was raised across 86 funds in 2017, compared to $16.9 billion raised with 102 funds in 2016.

Highlights for the higher end of the middle market (funds between $500 million to $1 billion) include:
• Exit activity reached more than $154 billion in 2017, up 60 percent from 2016 and eclipsing the previous record in 2015 of $136 billion.
• The funds raised a record amount of capital in 2017, $39 billion, eclipsing the $35 billion record set in 2016.
• A total of 117 funds were closed in 2017.
• Firms launching their first buyout funds raised $3.1 billion, down from $6.3 billion in 2016.
• Deal activity was down slightly in 2017 from 2016, with 1,133 transactions completed worth a combined $44.8 billion, compared to 1,258 deals worth $51.2 billion in 2016.

The authors of the Akerman report expect that M&A backed by PE funds with less than $1 billion under management will continue at historically high levels through 2018, assuming a healthy economy, which would continue a trend since 2013. According to the report, while the concern is that assets under management in this market segment have grown so much that deal competition may depress returns, the report’s data suggests otherwise. Assets under management in the sub-$1 billion U.S. buyout funds sector has not grown compared to AUM for all private markets funds and the Russell 2000, according to the report.

The outperformance of the sub-$1 billion funds relative to other private investments, combined with the fact that purchase multiples are lower than in the other private investment categories, indicate that that the sector is still maintaining investing discipline in the market, Roston says. Also, he says, the advent of reps and warranties insurance in recent years has promoted more collaboration between buyers and sellers, along with more focus on key drivers and risks in potential deals, which is promoting better dealmaking.

“With growing competition and robust valuations for quality buyout targets, increasingly there is a premium on sophisticated deal sourcing through industry relationships, as well as on cost-effective and efficient processes that facilitate closed deals, collaborative relationships with management teams and prudent risk management,” Roston says.