“Cash, cash everywhere, but not a company to buy.”
That might as well be the current official motto of US private-equity firms, whose hunger for acquisitions is becoming more apparent as their piles of dry powder grow.
“A year ago, fears of an economic slowdown and worries about trade tensions with China sent a tremor through markets and put some leveraged buyouts on hold,” said a recent report by the Wall Street Journal. “But while stocks rebounded in the new year, buyout activity never fully recovered.”
Citing data from Preqin, the report said that the aggregate value of US buyouts fell 25% year-to-date through October relative to the same period in 2018. The total value of deals in the first 10 months of 2019 clocked in at US$155.2 billion, the lowest since 2014.
The surging US equity market is part of the problem, as it has made takeover targets too expensive for even the most aggressive PE buyers. Corporate suitors, whose stock prices have also increased, have an edge over financial buyers as they can offer shares as part of any bargain they strike to acquire a firm.
“The restraint buyout firms are showing suggests a level of discipline that wasn’t present during the last market peak in 2007, when they struck $365.9 billion worth of deals in the US,” the Journal said, noting that many of the companies that were snapped up went on to struggle during the global financial crisis.
Along with the drop in deal activity, Preqin has reported that the amount of cash that PE firms have earmarked for North American buyouts has swelled to a record US$771.5 billion, up nearly 24% since the end of 2018 and more than twice its documented levels at the end of 2014.
The pressure for PE firms to pull the trigger is rising, particularly among those who have accepted business from institutional investors such as pension funds, sovereign-wealth funds, and insurance companies. To satisfy such clients and begin earning management fees, those funds will need to invest the money that large investors have entrusted them with.
“US buyout volume may not bounce back next year either, even if the stock market cools off,” the Journal added, citing certain PE investors’ plans to tread carefully as the US presidential election, uncertainty surrounding fiscal and regulatory policy, and heightened scrutiny from Democratic presidential hopefuls weigh on their industry.
Those who tilt their head a certain way will see bright spots. From a global perspective, PE deal volume has maintained its pace from last year. Certain pockets of the US market, including firms that invest in business software, have also kept their stride partly because of a proliferation of targets.
“In our space, given that many companies lack profitability, they can be highly volatile,” Orlando Bravo, founder and managing partner of software-focused firm Thoma Bravo told the Journal in an interview. “So when their revenue growth slows or they miss numbers, that can provide opportunities.”
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