The third quarter isn’t officially over, but we here at PE Hub believe that Q4 effectively starts after Labor Day and wraps up around Thanksgiving. Things have been plenty slow for July and August, but according to an informal survey of investor expectations, the fourth quarter will end up on par with the first half of the year.
A (very) general and unscientific sample group told us that despite a slight dip in Q3, they expect deal announcements to slug on through Q4, with the year ending flat. The basic consensus is: “It’s not that we don’t want to do deals, it’s that we can’t do deals.” Here’s why:
1. Deals are taking almost twice as long to execute nowadays. Boards review offers more cautiously, PE firms do far more extensive diligence, lenders are more cautious about commitments.
2. The “valuation reality check,” as one banker put it, has yet to sink in. Buyers are still waiting for deal values to come down, and sellers are still refusing to accept lower values. This has been the case for more than a year now, and tells me that “post-credit crunch” isn’t exactly the buyers market everyone is salivating over. “People are still waiting if they have that ability,” one buyout pro said.
3. The distinct line between “good deal that’ll get done” and “mediocre deal that will surely go bust” won’t blur anytime soon. That critical board, extended diligence process and cautious lender thing I talked about before? That’s weeding out most of the duds.
On the fund-raising side—Again, “It’s not that we don’t want to invest in private equity, it’s that we can’t invest in private equity.”
Many institutional investors have seen their pool of capital pummeled by declines on the public equities side. So whatever percentage they’ve allocated to private equity is now coming from a smaller pool. For that reason, LPs are re-upping but not taking on a ton of new relationships. (I ask—doesn’t this mean they’re less diversified? Scary…)
But as I’ve hinted at before, there’s lots of interest for growth funds, especially since their deal flow may be the strongest out there, with the IPO option no longer available to young companies seeking capital.