Granahan: Hurry Up And Wait
October 5, 2009
Last week, a soft reading in consumer sentiment had Wall Street all aflutter about the staying power of our nascent recovery. The pullback was just the latest reminder, the doubters said, of the fragility of the rebound in the economy and the stock market. That case was further enhanced by a most disappointing (if you're a bull) Chicago Purchasing Managers report last Wednesday, which showed a retreat in nearly every key category, including the all-important new orders index.
As we've touched upon before, the last quarter of the year is likely to be anything but dull, not only from a stock market and economic data perspective, but on the deal-making side, too. There's a feeling among many market observers that something's gotta give -- either earnings are going to be sharply higher (for whatever reason) and the piles of cash sloshing around will inevitably lead to higher stock prices, or the benefits of the various government initiatives have topped out and we're staring at a deep recession.
For M&A pros, a similar backdrop exists. According to third-quarter figures released yesterday by PitchBook, for the first time in a year the number of completed investments and the total amount of capital invested, 201 and $6.7 billion, respectively, remained steady from the previous quarter's levels. That points to a potential bottom for PE activity.
"As debt markets begin to normalize bigger deals will return, however, many investors are currently focused on distressed investments, and lower and middle-market deals with very moderate levels of debt," said John Gabbert, the CEO of PitchBook. (One remarkable, if not totally unexpected, number from PitchBook is that PE investment in distressed companies hit about 10% of overall deal flow in the third quarter, up from 2% in the year-ago stanza.)
But here's the flip side of that argument: that $1 trillion number that always gets bandied about -- the "dry powder" that the PE firms are sitting on -- has been there for some time now. Each quarter we get almost breathless reports of the amount of money the buyout firms have to spend, and yet, it doesn't seem to be getting spent. And, frankly, saying that we simply got back to 2008 third-quarter levels of dealmaking isn't exactly a ringing endorsement of the state of the market.
If you're an M&A pro, what's the real impetus for making a deal now (outside of the distressed arena)? One can argue that just as skittish retail equity investors may keep to the sidelines until things become more clear, the same might be said of the PE crowd.
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