In the aftermath of the credit crisis we have witnessed business for private equity groups come to a halt. In the first half of this year, only $24 billion in deals were completed worldwide, compared to $131 billion and $528 billion in deal volume in 2008 and 2007, respectively.
It looks like now the outlook for private equity may have just reached a turning point. According to a Goldman Sachs report A perfect storm for M&A “The private equity industry is starting to see some positive signs, serving as an incremental tailwind for this M&A cycle. While capital raising conditions remain difficult, we are encouraged by several factors, including significant ‘dry powder’, improving capital market conditions, a pickup in realizations and rising opportunities for returns, which further support our favorable stance on M&A.”
One of the hardest aspects for private equity business has been the availability of financing; the high cost of borrowing and the increase in credit standards for PE loans have substantially affected the M&A business. Another reason why PE firms were deterred from doing deals in the months following the credit crisis was due to the fact that they had stacked their portfolios when business was roaring in 2007. Many of these firms are basically trying to nurture these firms that they have invested in and make sure that they survive the remainder of the downturn in the US economy. Currently, PE firms are sitting on a lot of cash and are analyzing potential targets for the end of this year and into 2010.
“On the sell side there have been some distressed sellers, and those seem to be the deals that have been getting done. Going forward I think that we’ll see an uptick in the number of private equity deals getting done. I think that it will turn into somewhat of a seller’s market as the buyers become more aggressive after sitting on the sideline for so long” stated Cross Keys Capital Associate, Robert Athas.
Cross Keys has recently experienced some loosening in the commercial credit markets with regard to its own engagements. Senior debt, as well as mezzanine financing, has been committed to deals allowing for PE funds to come off the sidelines.
One tactic that PE firms will use in the months to come is to take opportunities to invest in underpriced companies even if it forces firms to look at new industries that are different from past strategic focuses. “We expect PEs may need to be flexible — both in structure and sector. There is more willingness to look at investment opportunities beyond the traditional sectors and structures,” noted Michael Bracken, a managing director at Royal Bank of Scotland at the World Knowledge Forum in Seoul this past week.
“What may drive their investment focus may more often be what is available.”