U.S.-based buyout firms just completed their most dismal quarter of deal-making in six years.
U.S.-based LBO firms closed 185 control-stake deals in the second quarter, well short of the 302 completed in same quarter of 2007, which was an all-time high, according to PE Week affiliated-publication Buyouts. The drop-off in disclosed dollar volume is even starker: The 36 deals with disclosed values added up to just over $10 billion in the second quarter, down from $115.0 billion the same period the year before.
The last time U.S.-based firms piled up such small numbers was the second quarter of 2002, when the industry racked up $8 billion in disclosed deal volume.
A year ago, six mega-deals alone accounted for more than half of disclosed volume in the second quarter. Deals of that size are no-shows in 2008. Consider that the biggest completed deal of the just-completed second quarter was
Other statistics from Thomson Reuters suggest the market may have turned a corner, at least temporarily.
Meanwhile, the number of control-stake deals announced in the last quarter (some of which closed, some of which remain pending) ticked up about 25% from the previous quarter, rising from 163 to 211. Disclosed deal volume measured this way also grew quarter-to-quarter, from $15.6 billion to nearly $21 billion. Also encouraging, buyout firms announced a handful of billion-dollar-plus deals that had underwriter tails wagging, including Carlyle Group’s pending $2.5 billion purchase of the government consulting business of Booz Allen Hamilton.
With credit markets showing few signs of a revival, buyout firms have struggled to complete any deal, much less the large-scale take-privates that dominated the landscape in 2006 and 2007. For those deals that do get done, buyout firms have had to contend with purchase prices that haven’t fallen nearly as fast as leverage multiples. It is a circumstance that foretells lower returns in the months ahead.
For buyout shops, the big drop-off in deal pace has meant sitting on an enormous pile of dry powder, while trying to find creative ways to deploy it.
Indeed, more and more deals look not like traditional leveraged buyouts but like growth-equity deals, private placements in public companies and other forms of minority-stake investing.
Through mid-June 2008, U.S.-based firms plowed $14.4 billion into minority-stake deals (based on deals with disclosed valuations), compared to $20.9 billion for all of 2007 and $17.3 billion in 2006, according to Thomson Reuters (publisher of PE Week).
Still other firms have sought deal flow overseas, where the radioactivity of the U.S. mortgage meltdown hasn’t been as pronounced. For institutional investors, the slowdown in deals, both acquisitions and exits, has meant fewer distributions, which eventually could lead to fewer new commitments.
For investment banks and other service providers the slowdown means less work and no end to the layoffs that have taken place across the industry in 2008. —Jeremy Harrell