Back to School: Election has little impact on mid-market PE M&A

  • Middle market PE deal flow unlikely to be impacted by political situations
  • US PE firms closed on $295 bln deals through first three quarters in 2015
  • Mid-market sponsors closed on $265 bln during same period this year

Presidential elections are said to be a source of consternation and volatility, causing U.S. buyout markets to tighten. Not so, says Pitchbook.

“There is a popular belief that deal flow slows in a presidential election year as investors wait to see if there will be any political changes affecting the economy,” the private equity industry data provider said in a recent report. “However, our data show this not to be the case.”

Middle-market PE deal flow tended to parallel broader M&A trends in election years, Pitchbook says. U.S. mid-market PE deal volumes fell 45 percent to $194 billion in 2008 amid the global financial crisis. Four years later, volumes swelled to $310 billion, mirroring the post-crisis recovery.

Pitchbook projects these volumes to fall this year, though that’s “mostly due to market fundamentals that were in play long before the political environment became as uncertain as it may appear today,” the report says.

Mid-market deals — transactions with enterprise values as much as $1 billion — are less likely to be hurt by dramatic policy or regulation changes, sources said. Through 2016’s first three quarters, middle-market sponsors completed 1,330 transactions totaling $265 billion. U.S. PE firms closed on $295 billion of mid-market deals in the year-earlier period.

“I don’t think any of that stems necessarily from the election,” Pitchbook senior analyst Nizar Tarhuni told Buyouts. “Regardless of the election, people have built in a slow growth model.”

Both major-party presidential nominees voiced varying degrees of skepticism for trade agreements, which could affect cross-border deals, and changes in regulatory or tax policy could hurt the long-term viability of larger transactions. Middle-market deals, by definition, have a smaller footprint.

That said, GPs are still preparing for the “slower growth model” Tarhuni referenced.

“People are taking different approaches. Some people are hunkering down; some people are using the election as a reason to get things done,” Jeremy Swan of CohnReznick told Buyouts.

Declining M&A volumes, along with the slower-growth model some GPs have adopted, are leading certain firms to examine their own portfolio companies in preparation for an eventual downturn, Swan said. Furthermore, separating anxiety over 2016’s unusually volatile election cycle from broader economic trends is challenging, he said.

“Just like everything, it’s so hard to tell. Especially this time with so many external factors,” Swan said. “If you look at the M&A market in general over the last 18 months, it’s been impacted by uncertainty with the election, geopolitical risk, Brexit, as that’s certainly weighed down the M&A market.”

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