The coming months could see private equity deal activity plunge to levels not seen since the uncertainty brought on by the financial collapse more than a decade ago, according to a recent report from PitchBook.
In the first quarter, 1,384 private equity deals closed in the U.S. for a combined $186.4 billion, showing a year-over-year gain of 7.3 percent. However, as reports of second and third quarter activity arrive, the dearth of announced deals and the ramifications of the COVID-19 pandemic will begin to show, PitchBook said.
PitchBook projects that few new investments that general partners pursue will likely be minority deals or small transactions that can secure financing.
The coronavirus pandemic has made in-person due diligence nearly impossible as shelter-in-place orders remain in place nationwide, according to the report. However, some states, including Texas, are reopening certain businesses after being stalled for weeks.
Foley & Lardner partner Christopher Converse, who is based in Dallas, said that most of his middle market private equity clients and contacts have acknowledged that the deal market is “pretty much dead right now.”
Todd Dauphinais of Dallas-based Clavis Capital Partners said that he feels like many private equity firms are focusing on current issues.
“I liken it to we’re still in the middle of the car crash,” Dauphinais said. “Maybe we’re at the end of the car crash – I don’t know – but it’s still happening. And everybody’s trying to figure out what is the future going to look like.”
Is North Texas the exception to the rule?
Dallas-Fort Worth has a diverse economy, said Andy Rabin, J.P. Morgan managing director, head of Southwest Investment Banking. Firms across North Texas could be active in the dealmaking market, but ultimately it depends on a private equity firm’s portfolio companies and investments.
“It’s going to be mostly a function of what else (firms) have in their portfolio,” Rabin said. “How are those businesses doing? That is going to influence heavily, I think, how different private equity firms look at opportunities over the next six to 12 months, as well as what’s going on in their own portfolio.”
Additionally, Rabin said one of the big trends he’s seeing is financial sponsors taking advantage of themes based on their area of expertise and investing in adjacent spaces where they feel like they have something to add.
Opportunities in distress
An area of private equity that could see a lot of activity is distressed dealmaking, Dauphinais said.
“If you’re a seller right now and you have a really good, healthy company and you can ride through this, who is going to sell it in this environment if you don’t have to?” he said.
Converse expressed a similar sentiment, noting that private equity firms that are more tolerant and have experience with distressed situations are going to do well.
“There are several (firms) around town that are in that category that understand risk and are not afraid of significant financial issues with companies,” Converse said. “That is, I think, where the opportunity lies.”
Return to ‘true normalcy’
It’s too soon to tell when dealmaking will ramp up again because various factors, such as in-person due diligence, are especially affected by the coronavirus outbreak, Rabin said.
“There’s only so much stuff you can do by Zoom,” Rabin said. “We need to get things back up and running, I think, for the M&A market practically speaking to pick up, but you don’t know. That potentially could come back more quickly than any of us think. You just don’t know.”
Both Converse and Dauphinais said that the timing of when things return to normal is unclear.
In the last half of 2020 and into 2021 is when Dauphinais said his private equity firm would be especially focused on finding and investing in good companies that hit a rough patch, but have the ability to rebound.
The economy will need to show signs of health before people are confident to take risks as a buyer, Converse said. However, the uncertainty with both the presidential election in the fall and the coronavirus pandemic are not good for M&A activity.
“I would like to think, as an optimist, that we’re going to start to see true normalcy next year,” Converse said.
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