As GF Data makes the rounds of ACG events and other professional conferences, we get to have the “what are you seeing” conversation in a lot of settings. Based on this scuttlebutt and the completed deal data we’ve collected through the third quarter, I’ve come to believe that the upswing in middle-market private equity deal activity is more pronounced – and likely to be less choppy – than many predict.
The 150 active PE firms in our universe completed about 20 deals in the first quarter of 2010, up a bit from the “death valley days” of ’09, but still well off of the 40-plus deals a quarter being closed in 2006-2007. This volume perked up to nearly 30 in 2Q. (I’m using approximate numbers because data is still coming in.)
Many deal professionals point to a still-uneven recovery and expect (a) reported third quarter deal volume to be tepid; (b) a spike in 4Q as sellers rush to complete deals in the current tax environment; and then (c) a drop off in early 2011 as that bulge passes and business owners remain confronted with uncertain economic and market conditions.
Well, first of all, much more got done in the third quarter than this analysis suggests. GF Data will report a continued rise in volume from 2Q to 3Q.
We expect that volume will continue to rise in 4Q, but not dramatically – and not followed by a return to arid conditions early next year.
We see a smoother glide path for three reasons:
- Many sale mandates initiated in the past year based on tax motivations (along with other factors) have already closed, as evidence by the 3Q activity level. One west coast firm reports that it has already completed three such transactions in 2010.
- The cocktail party buzz around this issue always seemed to be greater than the actual impetus in the marketplace. According to investment bankers and other GF Data subscribers, tax-driven sellers were well out-numbered by business owners not inclined to “time” their exits based on external considerations.
- The perceived urgency surrounding tax changes (and, for that matter, other legislation affecting business) has diminished as businesspeople sense a return to two-party rule in Washington.
If there is a volume downdraft (all other conditions remaining unchanged), it’s likely to hit in the second half of ’11. Not a lot of properties are coming to market now, based on the assumption that buyers and lenders are consumed with the transactions trying to get done by year-end. That decline in new product is likely to be felt in six to nine months.