PE deals in Q3 slump

December 2015 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

Q3 2015 saw private equity (PE) deal activity slump considerably according to new data from Pitchbook.

The decline in PE dealmaking in Q3 sees the continuation of the general fall in deal activity. Deal exit channels have cooled considerably over the last 12 months or so, which has had a detrimental effect on activity in the space. Activity in the US in particular has suffered, falling in Q3 2015 to its lowest level since the second quarter of 2013.

Capital invested in the US – excluding the gargantuan $45bn merger of Heinz and Kraft Foods – also fell to a level not seen since early 2013. Much of the decline in dealmaking activity, according to Pitchbook, relates to the high valuations companies are placing on assets. These price tags have proven prohibitive, and as such have negatively impacted activity; accordingly, many would-be acquirers are finding themselves priced out of the market.

Valuations, too, have fallen consistently since 2014. This year we have seen a steady quarter by quarter decline in valuations from their peak. Q3 saw a continuation of this trend with transaction multiples and debt levels continuing to tumble.

Much of the dealmaking activity carried out by private equity firms this year has focused on add-on transactions. Pitchbook’s data suggests that add-ons were the preferred deal type of the year. Forty-seven percent of all deals completed by the PE industry in Q3 were add-on deals. For the year to date, add-on transactions were responsible for 62 percent of all PE deals. According to the report: “PE firms are consequently adding value to existing portfolio companies, looking to protect exit multiples in anticipation of the eventual decline of the seller’s market.” As a result of the PE industry favouring add-on transactions, the size of many completed deals has remained somewhat stunted. Deal sizes have tended to remain below $25m. Forty-seven percent of deals have been valued below $25m, while deals valued between $25m and $100m accounted for 21 percent of completed deals.

Pitchbook’s data also suggests that in terms of deal value, the core and upper ends of the middle market were responsible for the majority of deal value. Mega-deals have become more popular year on year, with around 22.3 percent of aggregate deal value. In 2014, mega-deals made up just 7.6 percent of the overall figure. Big ticket deals such as the Heinz-Kraft merger and the buyout of Informatica helped to bolster the percent of deal value generated by mega-deals. Given that many PE firms are still sitting on considerable amounts of dry powder, the means are there to complete more substantial deals, should the appetite return.

In terms of fundraising activity, Q3 2015 was the biggest fundraising quarter of the year in both vehicles closed and committed capital. Combined, 109 PE funds raised $80.3bn, a considerable year on year rise from the $62.4bn raised by 110 firms in Q3 2014. The most active fundraising region was North America. However, the largest fund was raised in Europe by EQT Partners. Overall, 75 percent of the funds raised in Q3 2015 achieved their fundraising target, with an average time to close of 18 months.

In terms of exits, in the third quarter PE firms preferred trade sales for their portfolio companies. To the end of September, total exit value via corporate acquisitions exceeded $175bn, more than any previous year in its entirety.

Richard Summerfield