PE-Backed M&A Drops 26% in Q1, Firms Putting in 31% Equity In Deals

What’s a PE index?

According to the Private Equity Growth Capital Council, the index is designed to provide “an accurate snapshot of the state of the private equity market at any given point in time.” The index, PEGCC said, reached its highest level at the end of first quarter since the height of the recession. The index settled at 119.2, well above its 10-year moving average of 100, but still below the high reached in Q4 2006 of 154.9.

So things are good, I guess. Much more relevant–for me–is the data PEGCC kinda put together. The dollar volume of PE-backed M&A fell by 25.7% to $51.7 billion in first quarter compared to $69.6 billion in fourth quarter 2010, PEGCC said citing Thomson Reuters data. The reason for the decline? The PEGCC said it was the lack of “large and mega buyout activity” this year.

Tony James, the Blackstone Group’s president and COO, talked about LBO activity during  an earnings call in April. James said there will be much competition for LBOs in the short term. “Plain vanilla buyouts are pricey for us,” he said at the time. “We have to find more creative ways to invest money.”

Still, more favorable debt markets have reduced the amount of equity PE firms must contribute to deals, PEGCC said. In 2007, PE firms usually put in about 31% equity. This rose to 45.7% in 2009, during the height of the financial crisis. Currently, PE firms are putting in 35.4% equity in LBOs, PEGCC said using data from S&P’s LCD.

Fundraising also has gotten better. In first quarter, 57 buyout funds received $24 billion in total commitments. This compares to roughly 55 funds that collected $14.6 billion in fourth quarter 2010 (this info came from Thomson Reuters). PEGCC said the increase is mainly due to a small number of buyout funds receiving large commitments.

The amount of dry powder available to invest remains near record levels, PEGCC said. Buyouts had $414 billion of callable capital reserves as of April; this is down slightly from the $429 billion in dry powder available in December (Preqin supplied this data). The drop is mainly due to PE firms putting their money to work, PEGCC said.