Deal activity to remain subdued until people can shake hands again: Blackstone’s Gray

Private equity is unique from other investment strategies in that deals traditionally rely on personal interaction for vital assessments like inspections of factories and offices and interviews with management teams.

While public markets investing can be done from a screen, private equity dealmaking is a different sort of animal. It’s this aspect of the asset class that may prevent private equity deal activity from returning to pre-pandemic levels until society and business are able to open completely.

Some deal activity has returned since the complete lockdown environment of early spring. First-half M&A numbers showed that the value of closed deals in the second quarter totaled $144.1 billion across 785 transactions, down from $182.5 billion across 1,390 deals in the first quarter, according to Pitchbook data.

Partly the drop can be attributed to firms turning inward to tend to their own portfolio companies, Buyouts sister publication PE Hub wrote. But also, sellers chose not to bring processes to market as prices dropped, choosing instead to wait for a resurgence in valuations.

And, dealmaking may not be poised for a strong comeback until people can shake hands, according to Jonathan Gray, president and chief operating officer, who spoke about the deal environment on Blackstone’s second quarter earnings call earlier this month.

“It’s a headwind,” Gray said about trying to close deals in the remote-everything environment. “Transactions have gotten done, we announced a number of deals this quarter … but it’s definitely harder and I do think it weighs on the transaction environment.

“As the virus, 60, 90 days ago seemed to be receding, it felt like the deal activity was going to really pick up, there was a lot of pent up demand to do transactions,” Gray said. “As the virus goes away, once we have a vaccine, I do think you’ll see probably a step-up function increase in deal activity.”

Blackstone made a few deals amid the pandemic, including an investment in Oatly, a Swedish sustainable food company. Blackstone’s growth team led a $200 million investment in the company, along with Oprah Winfrey, Roc Nation, Natalie Portman, former Starbucks CEO Howard Schultz and others.

The firm also agreed to invest $337 million in the diabetes device portfolio of Medtronic. Blackstone also invested up to $2 billion in Alnylam along with its credit group GSO Capital Partners.

Interestingly, while M&A activity has taken a hit from the downturn, fundraising kept up relatively well in the pandemic. Firms like Blackstone have been the recipient of LP anxiety in the uncertain markets. Investors still want exposure to private equity, but they have been retreating to known managers instead of searching hard for new relationships.

The firm collected $20 billion during the second quarter across its platform, and will move into the fall with about $156 billion of uncalled capital, the firm reported.