Q3 PE deal slowdown blamed on 2012 tax rush

peHUB’s favorite slow mammal is the sloth, which averages 0.15 miles an hour.

As expected, U.S. private equity deal volume slowed in the third quarter, according to data from Thomson Reuters.

Deal values for U.S. announced PE transactions dropped roughly 20 percent ,while the number of deals fell nearly 6 percent,  the Thomson Reuters data showed.

There were 426 U.S. announced PE deals totaling $40.4 billion in the quarter. This compares to 453 deals raising $50.4 billion for the same time period last year, the data showed. TR is the publisher of peHUB.

The third quarter includes the summer time period when there are typically fewer transactions. The biggest PE deal in Q3 was the $6 billion buy of Neiman Marcus by Ares Management and the Canadian Pension Plan Investment Board .

Overall, U.S. announced M&A was a mixed bag. Third-quarter deal values were off 36 percent, but  the number of transactions actually rose. There were 2,290 transactions in the third quarter, valued at $345.6 billion. This compares to the 2,044 U.S. announced transactions totaling $253.62 billion in the year ago period.

The biggest M&A transaction in the third quarter was Verizon Communications $130 billion deal to buy Vodafone’s stake in Verizon Wireless.

Still, a general malaise seems to have descended on the PE industry. Several PE execs at the Dow Jones Private Equity Analyst conference last month blamed the slowdown on tax changes. Many firms rushed transactions at the end of 2012 before looming tax changes could go into effect. Private equity healthcare deal volume has plunged 65 percent this year, peHUB has reported.

“Corporate buys of private equity businesses are at a multi-year low,” one PE exec said.”There’s nothing going on.”

The lack of activity left the source “puzzled”, as the capital markets are robust and the economy has improved. However,  market players have seen several cases of “unrealistic financing proposals” to sell a company, which may be contributing to the slowdown, he said.

Such proposals will include 30 percent equity and 7x EBITDA financing for a company that is growth challenged, the source said. This means a buyer would end up paying 10x EBITDA, for a company that is worth 7 to 7.5x. Such deals are putting bidders off, the source said.

“People during the recession learned their lesson,” the source said. “People are being more conservative.”

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