Back to School: Election pauses PE deals in upper-mid market

Like everything in M&A this year, middle-market private equity activity dropped during the first half.

Pitchbook data shows that valuations fell roughly 7 percent to $180 billion invested across 925 completed transactions in the first half. The number of transactions dropped nearly 6 percent from 2015, when $193 billion was spread across 982 deals during H1, Pitchbook said.

When Pitchbook focused solely on the second quarter, middle-market performance was just as tepid. Deal volume dropped 11 percent to $89 billion invested in 442 closed transactions. The number of deals declined nearly 13 percent, according to the Seattle provider of market data on PE, venture capital, and M&A.

Nizar Tarhuni, a Pitchbook senior analyst and author of “US PE Middle Market Report 2Q 2016,” said many companies coming to market this year are of a lower quality than in 2015. Some were also acquired from 2011 to 2016. “They haven’t hit a period for harvest,” Tarhuni said.

Many GPs, Tarhuni said, are tending to their portfolio companies in the uncertain environment. “They’re more focused on rolling up their sleeves and making sure their businesses can be strong and withstand different external shocks.”

It’s Hillary or Donald

The upper middle market, which Pitchbook defines as $500 million to $1 billion, rebounded from the first quarter. Just 46 upper-middle market deals closed in Q1 this year, totaling $28 billion, Pitchbook said. That jumped 26 percent to 62 such deals completed in second quarter, valued at $34 billion.

Q2, however, is still way off last year’s numbers: 98 upper-middle-market deals totaled $53 billion in Q2 2015.

The presidential election is having more of an effect on larger deals, including upper-middle-market transactions, than on the core and lower end, Tarhuni said. Larger PE transactions typically go on “pause” during an election year and then rebound once a winner has been declared, he said.

“It doesn’t matter what side, you just need certainty. Once you have a winner you know what to expect moving forward,” Tarhuni said.

The lower middle market, which Pitchbook defines as transactions valued up to $100 million, emerged as one of the worst performing segments of the second quarter. Lower-middle-market-deal value dropped nearly 38 percent to $5 billion in Q2 while the number of transactions fell about 37 percent to 124.

The second quarter’s results also appear much worse when compared when compared with the first quarter, Tarhuni said. Q1 saw an uptick in activity with 228 lower-middle market transactions valued at $14 billion.

“With as much activity as we saw in the first quarter, the second quarter just came back to normal,” he said.

Action Item: The Pitchbook study: https://pitchbook.com/news/reports/2q-2016-us-pe-middle-market-report

Republican presidential nominee Donald Trump speaks at a campaign rally in Cedar Rapids, Iowa, on July 28, 2016. Photo courtesy Reuters/Carlo Allegri