Given that China’s now proverbial economic downturn has sent long overdue jitters through equity markets worldwide, it was inevitable that the private equity world would also take a breather. The increase of liquidity in just about all assets classes, turbo-charged…
Given that China’s now proverbial economic downturn has sent long overdue jitters through equity markets worldwide, it was inevitable that the private equity world would also take a breather. The increase of liquidity in just about all assets classes, turbo-charged through years of quantitative easing, was bound to create froth in the market – an excess of capital chasing too few assets. A correction and reality-check was certainly required, although I suspect a systemic collapse is not deserved. The knock-on effect being that when listed company valuations take a tumble, valuations of potential PE exits also take a hit. How long the current volatility will last I wouldn’t want to guess (as it really would be a guess), but there are some very interesting dynamics appearing on BankerBay.
Even before this very reactionary break in the equity markets took place, there were clear signals emerging that a significant shift in the deal marketplace was underway throughout the first half of the year – on BankerBay M&A deals surged during this period to 54% of total deal volume, versus 29% for the previous half. What was also indicative of a tectonic shift taking place was that the composition of buyers and sellers quite noticeably began to change, as private equity firms substantially increased their selling activities and corporate strategic buyers increased their engagement as acquirers (from 20% to 29% for the respective periods on BankerBay’s deal flow).
(Because of this demand BankerBay has created the new M&A Vault, specifically dedicated to this segment of the industry)
Looking at the U.S. deal market figures, which really hammers this point home, a report by the Private Equity Growth Capital Council states the volume of deals in which PE shops were sellers jumped to $195 billion in 1H15, which is an increase of 46% from the same period in 2014 and an even more stunning increase of 275% from the same period in 2013.
Furthermore the increase in PE selling reached a crescendo in 2Q15, with PE firms selling more than $125 billion of assets (which includes exits by IPO, as well as sales to financial or corporate buyers). Does this mean that PE funds started to read the signs before the equity markets were willing to listen? Or was this more a fortuitous function of PE fund maturity, having to liquidate assets as funds came to their natural end?
Whether this re-opens the debate of whether private equity investors are still driven by fundamentals, and public equity investors by momentum (yes, I went there!), who’s to say. I’m sure my esteemed public equity peers would draw further attention to the parallel timelines of QE, increased PE fund-closes and the natural 5-7 year life cycle of said funds, as arguably the key driver of such serendipitous exits. Whichever logic you believe, it is still too early to speak with much confidence about what lies ahead for the deal market for the rest of the year.
Will the M&A deal market reach an inflection point? Has the drop in equity markets been enough to bring back the PE shops as potential buyers just yet (suspect not quite)? A little more time will tell. In the meantime, the strength of the M&A deal market for the remainder of 2015 will most likely be driven by strategic interest, in turn dependent more on the shorter end of the bond yield curve (assuming equity markets don’t free fall, when the world tends be struck by a degree of paralysis).
Not wishing to labor a point (but laboring this point!) during the first half of 2015 investment grade corporate bond issuance in the U.S. exceeded $700 billion, an increase of more than 32% over the previous high-water mark set back in 2007. So it stands to reason that as long as the debt-financing window stays open for corporate buyers, it should bode well for M&A deal activity remaining at a high level.
Keep watching the activity in our M&A Vault and we’ll continue to highlight more emerging themes in our publications on BankerBay.