In the first quarter (Q1), the global economy was brought to a halt as a result of the spread of coronavirus (COVID-19) and its ripple effects. Whereas general merger and acquisition (M&A) activity began to decrease in the first quarter (see M&A results here), private equity (PE) firms continued to make use of their record-high levels of dry powder. PE investments were up an estimated 6% by volume year over year in Q1, and valuation multiples were higher than the averages for each of the prior ten years (see page 7).
The second quarter is likely to have lower volume, as some deals that were in-process when coronavirus hit are either cancelled or delayed until Q3 or Q4. This is evident in preliminary transaction volumes in the second quarter (see page 4 of the report and our post on April activity). However, we expect the drop for PE deals to generally be less than the drop in general M&A and to rebound more quickly. We are seeing increased activity from PE firms actively reaching out to generate deal flow for new platform investments and add-on acquisitions for existing platforms – albeit with noticeable shifts in industries that are in and out of favor.
Despite a healthy number of acquisitions pursued by PE groups in Q1 2020, PE exits, or instances in which a private equity group exits an investment, fell an estimated 37.3% by volume year over year. This can be attributed to several factors, including public market volatility, travel restrictions, and a decline in expected exit valuation multiples for portfolio companies.
While activity levels are down, our experience is that private equity firms, particularly those flush with cash, are always opportunistically seeking quality deals. Contact us if you’d like more details on a specific industry.
A copy of the full report is available here.