Predicting limits to the current M&A market is a difficult matter even after scoping the level of activity. What’s in a number? The $1 trillion in announced 2Q merger activity is substantial and represents the third straight quarter that deal value passed that milestone since S&P Global Market Intelligence began collecting figures in the 1990s. Let’s take a look at the ingredients of this unprecedented run.
Signs of frothy financial sponsor valuations are evident across sectors. Refinitiv finds that the average private equity takeover reached all time highs at 13.2x enterprise value to earnings before interest, depreciation, and amortization in 2020. That’s up slightly from 2019, but is noticeable given valuations’ resilience in an act-of-god market environment.
That trend is expected to continue higher as well. Financial sponsors expect valuations to increase this year, according to a BDO survey of private equity and venture capital managers. General partners told BDO more financial sponsors are getting off the sidelines, creating more robust competition for target companies.
SPACs and PE, fresh off record fundraisings, are planning to pour even more capital in the market. SPAC issuance fell precipitously following the Securities Exchange Commission’s announcement of plans to provide new guidance on the vehicles in April. But the capital waiting to be spent on deals is estimated at $700 to $800 billion, according to EY, and private equity-backed SPACs account for nearly 10 percent of such vehicles.
In a market awash with SPACs, buyers who can offer deep sector expertise can differentiate themselves from general asset managers whose rush to deploy funds could result in high purchase prices, Mergers & Acquisitions previously reported. For now, the party rages on.