More PE deals in Q2, but hardly ‘mega’

Buyout funds are making a comeback after nearly two years of virtual shutdown, but private equity-backed M&A volumes remain far short of the boom times.

As of June 22, private equity-backed mergers and acquisitions in the second quarter were up 125% from a year earlier to $40 billion, and were up by a third from the first quarter, according to Thomson Reuters (publisher of PE Week). For the year, such deals totaled $70 billion, more than double a year earlier.

The $70 billion of PE-backed deals this year through June 22 compares with the record $542 billion in the first half of 2007.

But with the European debt crisis denting the stock rally, there are concerns about whether PE activity can keep up the recent momentum.

“M&A markets are fragile. There was a slight loss of momentum in the second quarter. Coming off year-end into Q1, momentum was good,” said Jeffrey Kaplan, global head of mergers and acquisitions at Bank of America Merrill Lynch.

Availability of easy credit is the key for a pick up in PE buying, and bankers say the U.S. market has seen the most dramatic improvement in financing, driven by large financial institutions.

Overall, choppy equity markets and the rising cost of debt funding will make private equity dealmaking more of a challenge, though bankers say the market for mid-sized deals should open up.

“It will be a while before we get back to mega-deals,” said Mike Netterfield, head of financial investor coverage for Asia at RBS.

“We’re seeing some larger deals, but it’ll be a while before we see the days of the TXU, HCA kind of deals,” he said, referring to big U.S. private equity deals involving the likes of TXU, now Energy Future Holdings, and hospital operator HCA Inc.

While the sector offers some hope, the past quarter also brought disappointment.

A $15 billion buyout for payment processor Fidelity National Information Services was among the deals that failed after differences over price.

Other public-to-private transactions are in process, though. Australian hospital operator Healthscope Ltd. has had bids from two private equity consortia in a deal valued at about $1.5 billion.

“For private equity, $3 billion to $5 billion will be a large deal,” Kaplan said. “The Street has been working on $10 billion to $12 billion deals, but there have been concerns about underwriting and spreading the risk.”

Another trend to watch out for over the coming quarters is cashed-up PE funds chasing minority stakes in India and China, the fast-growth Asian emerging powerhouses where public-to-private deals are hard to come by.

“You’re still going to see minority deals getting done. In China and India you always get a lot of minority deal opportunities, where there aren’t that many control situations available,” Netterfield said. “You’re in a situation where stock markets are choppy and it’s hard to get public-to-private deals done. So minority deals are easier.” —Jessica Hall and Denny Thomas, Reuters