PE M&A declines in Q1

July 2016 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

Private equity dealmaking was strong throughout 2015, tailing off somewhat in the second half of the year. Yet activity suffered significantly in the first quarter of 2016, according to a recent report from Pitchbook.

Pitchbook’s data notes that dealflow continued to slip and exit volume was nearly halved on a quarter-over-quarter basis. Despite the dealmaking difficulties experienced throughout the sector, fundraising was actually relatively strong on a historical basis, particularly in the US.

Investment in the US, however, struggled. The first quarter of the year saw $130bn invested across 680 transactions, representing quarterly declines of 8.4 percent and 23.3 percent, respectively.

PE funds during Q1 2016 were responsible for the lowest percentage of M&A dollars in recent memory. At $82bn, PE funds accounted for just 16 percent of total value.

Pitchbook’s ‘M&A Report 1Q 2016’ suggests the decline in PE dealmaking was likely the result of sustained activity from corporate acquirers. The company’s US PE Breakdown 1Q 2016 also suggests that the decline in US dealmaking is a hangover from the drop in activity seen in the second half of 2015. From Q4 2015 to Q1 2016, deal flow has fallen and exit volume was nearly halved quarter by quarter.

Deal volume and values in the first quarter of 2016 reached their lowest levels since the second quarter of 2013. PE firms closed 388 middle market deals valued at a total of $71bn in the first quarter of 2016 – a 17 percent decline in volume and 20 percent decline in value over the same period a year ago. However, the decline seen in the first quarter of the year was not just stark in comparison with the same period last year, but also with the final quarter of 2015, dropping 22 percent in volume and 21 percent in value.

From this data it would seem that the PE industry is taking a moment to pause and re-evaluate its place in the deal market, following the impressive levels of dealmaking seen in 2015.

This data is backed up elsewhere. According to a report published by Preqin in May, private equity-backed buyouts globally fell sharply in the first quarter, to 874 deals worth $44bn from 962 deals worth $137bn in the fourth quarter, a post-financial crisis high.

The drop in PE deal making activity must be viewed through the prism of declining global M&A activity. According to MergerMarket’s report, global M&A activity declined in Q1 2016 after seeing high levels of activity in 2015. A number of factors may have contributed to this year’s decline. These include commodity prices, which have had a detrimental effect in certain markets, as well as Brexit fears causing currency concerns. A number of the world’s largest private equity groups, including KKR, have put a hold on all dealmaking activity until after the Brexit referendum has taken place.

Richard Summerfield