- GPs eye pent up demand for M&A
- Dry powder building up, with fewer deals
- Valuations seen leveling off
Investment banker Jeffrey Golman sees pent up demand for deals in 2016 as private equity firms that placed second, third or fourth in auctions scour the landscape for acquisition targets.
“Our pipeline is mostly indicative of a fairly healthy environment, at least in the first half of 2016,” said Golman, vice chairman at Mesirow Financial. “[Sponsors] have been frustrated and they haven’t been able to put money to work as quickly as they’d like to. Firms are broadening their horizons.”
With plenty of dry powder, robust fundraising and favorable debt conditions for quality companies outside the energy and mining sectors, the statistical outlook in the new year remains strong but not spectacular, in terms of the raw number of deals. Strategic players remain center stage with the biggest price tags, as sponsors bear down on the middle market to find more value.
A total of 364 deals by U.S. sponsors were announced or closed in the fourth quarter of 2015, as of December 14. That’s down slightly from 376 in the full, year-ago quarter and off sharply from 549 in the third quarter.
The Q4 total marks the lowest number since the second quarter of 2013, but it’s still well above the weak years of 2009-2011. And the figure is likely to rise with a final deal count for the full quarter.
Even with the Q4 dip, 2015 surpassed the previous year, with 1,911 announced or pending deals for the full year, up 4 percent from 1,836 for all of 2014, according to Buyouts data.
Lifted by the announced $14.3 billion deal by Acorn Holdings BV, Mondelez International Inc and BDT Capital Partners for Keurig Green Mountain Inc, dollar volume for announced and closed acquisitions rose to $77.2 billion in the fourth quarter, from $46.6 billion in the year-ago quarter and $66.7 billion in the third quarter.
For the full year, the disclosed value of pending and closed deals totaled $303.7 billion as of December 14, up 47 percent from $206.8 billion in 2014, according to Buyouts data.
Purchase price multiples climbed from year-ago levels but dipped from the third quarter, as credit tightened for first- and second-lien loans. The average purchase price multiple came in at 10.06x EBTIDA for the 11 months ended November 30, ahead of the year-ago figure of 9.68x EBITDA, but below the 10.8x EBITDA during the third quarter, according to S&P Capital IQ. Average leverage ticked down to 5.58x EBITDA from 5.74x EBITDA in the year-ago period.
Carl Thoma, co-founder of Thom Bravo, said he expects deal prices to level off in 2016.
“Valuations can’t go a lot higher than where they are right now,” he said in an email. “With interest rates going up a bit, banks aren’t willing to lend as much and valuations are pretty much at a peak. Until interest rates are higher and banks start lending less, the level of valuations won’t change.”
Mesirow Financial’s Golman said he expects renewed attention for food and beverage companies, other consumer goods companies, and energy companies. He also predicted the possibility of more take-private deals.
“Take-privates are much more time consuming, more expensive, with much greater uncertainty in terms of probability of success,” he said. “But since there are so few deals out there, sponsors may need to [take a look.] ”
Hiring, credit in the spotlight
Credit conditions remain somewhat challenging, with wider spreads making it more expensive to borrow for riskier companies. Dividend recapitalizations remain rare as well. But most GPs say they aren’t worried.
“We think private lending conditions will be healthy,” said Andrew Olinick, managing director and co-head of North America for 3i Group. “That leads to a bottled-up pipeline [in 2016] so a lot of companies may come up for sale in the first quarter. It should be an attractive environment with a fair amount of activity.”
While based in London, 3i Group has been increasing its presence in the United States, with more hires expected as it looks to make two middle-market platform acquisitions and possible add-on deals for Q Holding and Dynatect Manufacturing Inc.
“3i likes the U.S., and the growth here, and the size of the market,” Olinick said. “It’s been a beneficial market for us. We’ve been building up our team here, and we hope to add a vice president and an associate in 2016.”
Also on the hiring front, Dan Evans, partner at Ropes & Gray, said the law firm is looking to hire more mid-level associates in 2016, on top of growth in 2015.
“It continues to be the case that [M&A] is spotty from firm to firm,” Evans said. “Firms that are value oriented … They have to pick and choose. Firms less focused on buying things cheap and more focused on a story or thesis — they’re busier.”
Evans expects 2016 to remain solid unless the industry faces a negative surprise.
“The fundamentals of private equity are nice and healthy,” he said. “Dry powder is plentiful and LPs continue to increase commitments to alternative asset classes. Banks are a little tighter, but non-bank financing sources are expanding. As long as there are no significant external shocks [such as geopolitical problems in the Middle East], you should see robust transaction activity.”
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