PE Deal Flow Depressed In 2Q
News that private equity dealflow has slowed is no new news; the asset class faces difficulty in putting a record overhang to use given tight restrictions on how much debt can be found for deals.
July 1, 2009
The private equity business was in the doldrums during the second quarter, according to new data from PitchBook.
Buyout groups completed 407 investments in the first half of the year and 174 deals in the second quarter. Much of the transaction activity centered on add-on acquisitions, which are purchases made by private equity-owned companies. Despite the lower amount of leveraged buyout activity in the second quarter compared to prior years, however, there are indications that the deal business is on the uptick.
"It seems a lot better than the fourth and first quarters. Even though deals haven't really come back, people are getting back to dealmaking," said John Gabbert, chief executive of PitchBook, a Seattle-based private equity data provider.
Most activity was in the middle market, which Pitchbook defines as transactions with an enterprise value of $250 million or less. Small and mid-sized businesses accounted for 70% of deal activity in the first half of the year, according to the data provider.
Still, there are signs that larger deals could be in the works. One senior Deutsche Bank investment banker recently said his bank was involved in discussions surrounding multi-billion dollar leveraged finance packages.
Financial services companies drew the most dollars in the second quarter, or $8.6 billion of deal volume. Commercial banks, not surprisingly, comprised the bulk of dollar volume at $8.4 billion.
A private equity consortium backed the largest deal of the quarter with its takeover of failed Florida institution BankUnited in May, a deal viewed by some deal market participants as a precedent-setting transaction for private equity in the banking industry.
The amount of capital that private equity firms have to invest isn't insubstantial at $400 billion, which PitchBook notes is more than the amount deployed in deals from 2004 to 2006.
While the investment banking community has yet to fully open the lending spigot on leveraged loan issuance, it stands to gain substantial fees from arranging leveraged loans on behalf of private equity firms.
"If credit loosens up a bit, that's going to put the industry in a good spot," said Gabbert, noting the overhang of available capital.
Financial sponsors, in the meantime, have gravitated towards business products and services as well as information technology. The former accounted for 54 deals in the quarter, while IT attracted 29.
There was a dramatic falloff in consumer dealmaking in the second quarter, which made up for $762.5 million in volume, or 92% less than the amount of deals arranged in the industry segment from the first quarter of 2008.
One area within the consumer space that generated a solid amount of investor interest was retail.
"Retail is still the biggest one in terms of dollars being invested at $356 million in the second quarter," said Gabbert.
The investor interest is surprising. A number of private equity-owned retailers filed for Chapter 11 over the past year because of the economic downturn.
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