Deal volume sagged in the fourth quarter, bringing a dismal finish to a year marred by economic deterioration.
U.S. buyout shops closed 859 control-stake deals last year for a disclosed value of $136.1 billion. Those figures represent an 18% shortfall compared to the year before when the industry had an LBO deal count of 1,042, and a 71% plummet from the $474.8 billion record disclosed deal volume in 2007.
The clamps that closed on the credit markets in late 2007 drew ever tighter as 2008 wore on, reducing the buyout market to a tepid pace not seen in years.
In terms of dollars put to work, Q4’s $6.4 billion in disclosed deal volume accounted for an 88% drop in comparison to Q3’s $55.1 billion figure, and a 96% fall from the $147 billion put to work in Q4 2007.
Not since the spring of 2002 has the buyout industry encountered a three-month period with less than $10 billion in disclosed deal volume.
“The general view across the board is that ’09 is going to be a very slow year in terms of M&A activity,” says Christopher Williams, a senior managing director at Chicago-based lender Madison Capital Funding. “There’s not a lot of liquidity in the market, and that will keep sellers from rushing back. There’s just not a lot of positive signs in the market right now.”
The implications of a protracted slowdown in the LBO market are many. Coming off of record-breaking years in the fund-raising market, general partners are sitting on large pools of uncommitted dry powder. If a drawn-out deal moratorium impedes on the traditional five-year investment horizon, GPs may feel pressure to reduce fund sizes, or perhaps give limited partners the option of cutting their commitment sizes—as
Buyout firms, including The
Much of the pain being felt in the LBO market today can be attributed to the leveraged loan markets—or lack thereof. Gone are the days of a healthy loan syndication market. Even the middle market has been affected as business development companies have taken to the sidelines after seeing their stock prices fall to record lows. Specialized finance companies and non-traditional sources of financing, such as hedge funds providing second-lien loans, have also grown scarce these days.
“There were a lot of transactions that we worked on and pursued that you never saw a press release for, and that’s because we withdrew from the pursuit of them,” says Michael Beauregard, a partner at
“My hope is that by the second quarter it starts getting a little better,” says Steve Liff, managing director of
After closing 39 deals in 2007, Sun Capital Partners closed 26 deals last year and anticipates an even busier 2009. “We’re looking at more and more interesting opportunities as the credit crunch and the cash crisis continue to work their way through the marketplace,” Liff says. “There’s going to be a lot of ripe opportunities for companies like ours that focus on turnaround situations.”
Middle-market firms that were particularly active in 2008 included The
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