This Time Last Year We Were So Wrong

Following last year’s Labor Day weekend, peHUB declared that “The Real Q4 Started Today,” partly in wishful thinking that news would pick up after the painfully slow summer months.

We welcomed the potential increase in activity with an informal survey of Q4 predictions by PE pros, and those predictions could not have been more off.

For one thing, the sponsors we spoke with expected deal activity to return in Q4, with the back half of 2009 ending up on par with the first half of the year. That didn’t happen.

Naturally, no one expected that the reason deakmaking wouldn’t return would be a collapse of financial markets across the world, triggered by the bankruptcy of Lehman Brothers and collapses of, AIG and Merrill Lynch.

In fact, we pointed out a few things holding back dealmaking, and they haven’t really changed much since last year, Lehman and all. For one, deals still take almost twice as long to close as they did in the boom times. For two, The bid-ask spread on valuations has not exactly narrowed. (In fact, in most of the large deals getting done, it appears the buyer has paid a rather full valuation with a smaller amount of debt. The new paradigm will certainly be a drag on returns, right?)  And lastly, mediocre deals will simply not get financed for a long time.

The only major development that’s changed is the IPO environment. Around this time last year, we wrote: “IPOs Are Gone. Deal With It.” The two bold PE-backed filers which I pointed to a year ago-KKR’s Avago and Madison Dearborn’s Great Lakes Dredge & Dock-have both gone public just under the wire, and with a warm reception.

The warming of the IPO market, coupled with the slow return of deals (all being done under the “new paradigm” described above), may finally help last year’s Q4 predictions come true. Deal activity may in fact return. For the sake of having something to write about, I’m crossing my fingers.