Just last week, a Preqin press release proclaimed that “There were 705 private equity-backed buyout deals in Q2 2012, valued at an aggregate $60.4bn – a 37% increase in deal value from Q1 2012, and a 6% increase from the $56.8bn in Q4 2011. In addition, 293 private equity-backed exits were announced in Q2 2012, with an aggregate value of $77.7bn – a significant rise from the $47.2bn in exit value seen in the previous quarter.”
This seemed to be good news for the PE industry.
However, two studies released this week tell a different story. A Pitchbook Study –“The Private Equity 3Q 2012 Breakdown”, concludes that: “Deal volume fell by 17% in 2Q 2012 compared to the previous quarter and has been in a steady downward trend for more than a year. The $51 billion invested during 2Q was the lowest for any individual quarter since 2009….Halfway through the year, PE firms are on track to close just 1,332 deals in 2012, which would be the lowest level since 2003”.
How can both studies be correct?
We tend to believe that the Pitchbook data is more indicative of current conditions. For months, there have been scattered reports about how poorly the PE deal making activity has been. When the Preqin study was published last week we called it a “surprise”. Moreover, another study that was published this week; a study sponsored by The Deal called “The Strategic Compass for Deal-making: Catalysts for growth in 2012” indicated that the PE deal making activity was in fact poor in H1 2012. While that study talks about overall M&A activity picking up, it also points out that PE backed M&A activity was weak. “The majority of buyers have tended to be strategic dealmakers, as private equity deals have fallen sharply. According to PwC’s Curragh, the financing climate for private equity deals has become even tougher than a year ago as banks remain nervous about allowing the kind of leverage multiples that were more commonplace before 2008. That means PE firms must put in more equity, which has made deal making less profitable for them.”
Whether deal activity was up or down in Q2 is no longer the issue. The issue is more about what will happen going forward. On that issue, the data is clear – for good or bad, an industry according the Bain that is “awash in commitments” will have to start dealing. As the Pitchbook study concluded: “For all of the headwinds facing PE and the economy at large, two irrefutable forces will continue to compel PE firms to action: the more than $430 billion in dry powder reserves and the more than 6,300 companies currently in portfolios,” says Richard A. Martin, Jr., Senior Director at Merrill DataSite. “Regardless of the macroeconomic environment, PE firms will have to act in order to exit longstanding investments and deploy capital before their investing window closes.”
The PE industry will likely have trouble generating strong returns in this fire-sale environment, but we continue to believe that there are billions of dollars in untapped value in the market from unleveraged growth opportunities. For us, the question always has been: Will PE firms and their middle market holdings reach past their traditional comfort zones to find those growth and value opportunities?
Each of the studies mentioned in this note are fact filled, well done and worth reading in full. The Deal and The Pitchbook stud
The Preqin Press Release can be found at:
http://www.preqin.com/docs/press/Q2_2012_PE_B_Deals.pdf
The Pitchbook Study can be found with registration at:
http://www.pitchbook.com/library.html
The Deal sponsored study can be found with registration at:
http://digg.com/newsbar/Business/the_strategic_compass_for_dealmaking_catalysts_for_growth_in_2012