On Monday (10 April) last week, an S&P Global Intelligence report found global private equity deal value and volume tumbled year-on-year in March and in the first quarter of 2023.
Deal value fell 37.1% year-on-year in March, while overall private equity entries for the month totalled $63.4bn, compared to $100.8bn for the same period a year ago. The number of deals declined 48.9% to 885 from 1,733 a year prior, the lowest level in over 12 months.
Over Q1 2023, total transaction value declined 48.6% year-on-year to $122.8bn from $238.9bn. The number of deals fell to 2,873 deals from 5,017 transactions in the same period in 2022.
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Global M&A activity as a whole slumped to its lowest level in more than a decade in the first quarter of 2023, falling 48% to $575.1bn as of the end of March, compared to $1.1trn during the same period last year, according to data from Dealogic.
The fall in private equity dealmaking in March coincided with a period of turbulence in the banking industry, as the collapse of Silicon Valley Bank, the second-largest bank failure in US history, sparked contagion fears, while the takeover of Credit Suisse by its rival UBS sent shockwaves through financial markets.
"Having a well-functioning financing market is a critical ingredient for M&A. Market volatility has clearly been a challenge and weighed on deal volumes in the quarter," Brian Haufrect, co-head of M&A for Americas at Goldman Sachs, told Reuters.
Michel Degosciu, managing partner of listed alternatives research firm LPX AG, said that although it did not help, Silicon Valley Bank's fallout is not the reason why private equity dealmaking dropped over the past year, arguing the decline in PE activity had clearly begun pre-March 2023.
Dealmaking has been in decline since the second half of 2022, following the emergence of the war in Ukraine and rising inflation and interest rates.
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"We are coming from very high levels in 2021, which were atypical," Degosciu said. "The main driver for these levels in 2021 was the accommodative monetary policy of central banks. What we are seeing now is a normalisation.
"Investors, especially those in the venture capital space, are now much more cautious. They are now requiring a higher return because when the risk-free rate is higher fewer deals are attractive."
Overall, 2021 was a record-shattering year for private equity M&A, with private equity deal value surpassing $1trn, up 77% from 2020, according to KPMG. Degosciu said the industry should not expect to see the levels from 2021 anytime soon.
"This is also not desirable because the situation in 2021 was abnormal and driven by unusually benign monetary policy," he added.
According to Alan Gauld, lead manager of the abrdn Private Equity Opportunities trust, the slowdown has been driven by wider uncertainty and a disconnect between buyer and seller expectations in these new financial conditions.
"Debt for new leveraged buyouts has become less available and more expensive, meaning PE firms need to be very picky in doing deals in this environment," he said. "In this market, GPs have been more focused on doing add-on acquisitions for their existing portfolio companies."
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Rob Morgan, chief analyst at Charles Stanley, said the danger to the asset class, and to the financial system more widely, are the "forced sellers" of private equity assets as a result of the "damaging effects" of leverage combined with higher interest rates.
"Dealmaking will therefore continue to be muted probably until inflation is under control and rates start to be cut. At this point there can be more confidence surrounding the economic outlook and stabilisation in the cost of capital," he added.
"It is hard to see a catalyst while interest rates are moving up. While deals will not dry up altogether, a renaissance is only likely to come when it is perceived central banks have slayed the inflation dragon."
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APEOT's Gauld had a more optimistic view, noting that dealflow may start to cautiously rise following the summer of 2023. A clearer picture around inflation and interest rates may also help with the current disconnect between buyer and seller pricing expectations, he added.
"I do not see a strong, V-shaped rebound though; I expect it will be more gradual," he said. "Also, if some broader market issue arises, much like the recent banking situation, that could set things even further back.
"If banking issues re-emerge then all bets are off as to when private equity M&A activity returns with any sort of momentum."
Claire Trachet, senior advisor at Trachet, said the perspectives in the US are more optimistic, with predictions the 'renaissance' could arise in Q3 or Q4, noting there are rumours about the potential reopening of the IPO market.
Speaking of the bullish environment, Trachet said there may be an increase in PE deals due to some firms enjoying strong returns from some investments, allowing them to redirect capital into the market.
She added that some private equity firms focused on bigger or later stage capital may own freshly listed companies, which could become a target for acquisition if they endure a poor IPO.
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Despite the slowdown over the past year, M&A moves were in full swing on the London Stock Exchange on Monday (17 April), as publicly listed companies worth a total of £4bn were subject to takeover bids amid an improving outlook for the UK economy. Apollo was behind at least two of the proposals, which included THG.
The largest deal in March was private equity house Silver Lake and Canada Pension Plan Investment board's buyout of Qualtrics International from SAP America for a roughly $10.4bn all-cash transaction.
The second-biggest deal was the $8.2bn acquisition of Univar Solutions by funds managed by private equity firm Apollo from Parcom Capital Management, also in an all-cash transaction, which included a minority investment from an Abu Dhabi Investment Authority subsidiary.