PE has weathered one of its toughest economic periods. Firms that will thrive in the complex 21st-century world will be those nimble and creative enough to seize the opportunities an uncertain economy presents.
Globally, PE firms made 1,612 acquisitions1 in 2009, a 36% decrease from 2008.2 The average size of an acquisition in 2009 was smaller as total deal value fell 56%.
However, annual data mask the real story of 2009. The long retreat that began in the summer of 2007 ended as a comeback that began in the third quarter and gained strength as larger deals were announced toward year-end.
Globally, transactions worth US$39 billion were announced in the fourth quarter, up from US$24 billion in the third quarter, and more than double the US$18 billion announced in the fourth quarter of 2008.
Driving this recovery is the renewed willingness of banks to underwrite debt. Bloomberg reported that global high-yield debt issuance nearly tripled last year to US$210 billion, from US$74 billion in 2008.
PE firms, particularly those in the United States (US), used their share of new issues to replace existing portfolio company debt, gaining critical debt extensions in the process. The use of newly issued high-yield bonds to refinance leveraged loans is expected to continue through 2010 as interest rates on government bonds are expected to remain low, causing investors to seek higher yields.
Leveraged loans used to finance new acquisitions bounced back in the fourth quarter.
While Thomson Reuters reports that new issues in the US totaled US$80 billion in 2009, nearly half of that total — US$37 billion — was issued in the fourth quarter.
Financing for new acquisitions should increase gradually in 2010, barring major banks being hit with defaults on government and commercial debt in Greece and, possibly, Spain.
Uncertainty surrounds regulatory reform
While 2010 should be a better year than 2009 on all fronts, regulatory reform is a major uncertainty that could slow the industry's recovery. The European Union's (EU) proposed directive on alternative investment fund managers (AIFM) will dramatically affect both European and foreign firms operating in the EU.
Increased capital requirements in many markets could adversely affect lending, as could the “Volcker Rule” in the US, which would force banks to sell their PE operations and the income streams they provide.
Evolving tax rules in many jurisdictions could affect returns, as deficit-ridden governments seek to increase their tax revenue.
In last year's report, we highlighted the evolution of PE firms from their early years as buyers of family businesses to today's business entrepreneurs, renowned for transforming companies and injecting change capital.
Recovery takes shape
As the industry recovers, some PE firms will continue to diversify into other asset management functions and other advisory roles, such as capital markets.
In early 2010, valuations are improving, IPOs are encountering some resistance, leverage is returning in some markets, and some high-profile secondary sales have been completed.
Firms are taking advantage of improving markets to make acquisitions, enhance portfolio company performance, and exit investments in order to return funds to limited partners in advance of 2011 fund-raising rounds.
During the first three months of 2010, global PE firms have announced 358 transactions valued at US$27.0 billion, compared with 415 transactions priced at US$17.0 billion for the same period in 2009.
While the average deal size, where the value was disclosed, for those three months rose to US$157 million from US$70 million last year, it remains far below the pre-recession high of US$706 million in the second quarter of 2007.
2010 is looking to be an intriguing year with global PE activity on the rise.
956 acquisitions where the value was disclosed, and 656 where the value was not disclosed.2
Unless otherwise noted, Dealogic is the source of all acquisition, divestiture and IPO data cited in this report.