December 28, 2015
Interviewed by: Privcap
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PE Deal Activity: Healthy But Outpaced by Corporate Buying

Private equity industry experts highlight the key trends and drivers of the deal market in 2015.

Private equity industry experts highlight the key trends and drivers of the deal market in 2015.

PE Deal Activity: Healthy but Outpaced by Corporate Buying
2015 in Review

Peter Witte, EY: To put the global M&A environment in some perspective, we’re on track right now for about $5 trillion in global M&A deals. That’s up about 20% from 2007, so there’s a significant increase. And I think what’s different between ’06 and ’07 and now is that the current boom is really being led by the corporates. They’ve got an environment where organic growth is very difficult to come by.

Stock markets are still at or near their record highs. The financing environment is very accommodated for them, so they’ve decided that the path to growth for them is through M&A, which is making it difficult for private equity firms to get involved in the market, to some degree.

Lawrence Golub, Golub Capital: We see a great deal of activity in healthcare services—some in IT services, but particularly in business-to-business software. Consumer discretionary, non-fashion businesses have also been very strong and we’re seeing a good amount of kicking the tires in the energy area. With the declines in oil prices, many people are looking for opportunities in that area.

Witte: Valuations are really the issue for private equity firms right now.  Global M&A multiples have averaged about 12 times EBITA in 2015. That’s down a little bit from last year—they were about 12.3 times EBITA—but it’s still very high relative to historical averages. It’s making it difficult for PE firms to get involved. Back in ’06 and ’07, private equity firms were about 20% of global M&A activity. This year, they’ll be more like 5% or 6%.

Golub: Borrowing is relatively plentiful right now. Leverage levels as a percentage of value of the business are pretty good. The leverage level on absolute terms—or as an absolute multiple of EBITA—is very, very good. The fly in the ointment for GPs is that purchase prices are up, so they have to pay a big price to buy the companies.

Witte: Platform deals are very difficult for private equity firms right now to accomplish, so they’re looking for add-on deals as a way to stay engaged in the market amid some of these high valuations. Platform deals will probably be down about 4% to 5% this year, to about $300 billion, while…we’re looking at a record deal for add-on deals. We’ll see about $280 billion worth of add-on deals this year, which is a new record, by far.

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