Pointing out that private equity has historically been a key driver of M&A, the study discusses what we know as the “dry power,” or “overhang” conundrum. The disparity between the sheer amount of money invested in buyout funds and their inability to deploy it, the study argues, reflects a true negative in the market. The robust fundraising market “demonstrates clearly an over exuberance in the boom market rather than any prophetic insight prior to the subsequent busts.”
In other words, LPs didn’t see this coming.
But the most interesting part of the study’s private equity analysis is its predictions for future M&A activity. Private equity will quickly return to heavy hitter status in the M&A world once credit returns, the study argues.
What is clear is that if anything like favourable conditions return to the credit markets there is all likelihood that PE activity will return as quickly as it disappeared as PE firms are finally able to spend the huge amounts of money for which they have commitments, and once again contribute something akin to the 20-25% of total M&A volume as per the years preceding the credit crisis.
The commentary ends with something I consider to be wishful thinking, or even borderline delusional: Buyout firms can offset the lack of leverage by buying companies at depressed values. It’s that easy!
The measly M&A volume numbers* should make it crystal clear that that technique is not happening. Last year’s hopeful predictions from the likes of Henry Kravis and Steve Schwarzman about how “This is the best buying opportunity of our lives,” have not come to fruition, in part because sellers are simply too sophisticated.
More than a year into the recession and the buyer-seller pricing gap on healthy, attractive companies has not closed. And with “green shoots” on the horizon, it appears that it never will. Sorry, buyout pros, but from where I sit, it looks like the window for those bargain bin shopping sprees is nearly closed.
*In the first quarter of this year, private equity deal volume as a percentage of total M&A was at its lowest level since 2000.
View the entire report here: