The private equity business continues to slowly emerge from the doldrums.
For the third straight quarter, there was a rise in the number of deals, from 277 in the prior three-month period to 305, according to the latest quarterly report from Pitchbook. This is the highest level since the fourth quarter of 2008.
The size of the deals is also increasing. The median value in the first quarter worked out to a little more than $46 million, up from slightly more than $33 million in 2009.
What’s more, the big deals are now staging a comeback. Pitchbook counted 11 transactions already completed or announced valued at more than $1 billion so far this year, already exceeding the nine in all of 2009. It is also half the 22 billion-dollar deals in 2008.
The highest valued deal so far in 2010 (completed in February) is the $4.2 billion acquisition of IMS Health by Leonard Green & Partners, TPG Capital and the Canada Pension Plan Investment Board.
The increasing availability of credit is one reason we are seeing larger deals. As a result, buyers are putting up less equity than they had to last year. These days, equity accounts for about 43 percent of the total purchase price, on average. This is down from 50 percent last year. At the peak of the private equity market in 2006, buyers only needed to put up about 28 percent of equity.
However, in the first quarter, sponsors typically put up just 20 percent of equity to do deals in the $250 million to $500 million range, although it’s closer to 50 percent for deals over $2.5 billion.
Still, the PE market is not exactly sizzling. Sponsors still have a record $400 billion in dry powder looking to be spent, mainly because of the huge sums they raised in the middle of the decade.
Little surprise, then, that just $17 billion was raised in the first quarter, equal to the third quarter of last year and way down from $25 billion in the fourth quarter of 2009.
This is not a bad thing for the rest of the market. After all, when institutions start throwing money at PE firms and the PE firms start doing those gargantuan deals with ever increasing percentages of debt, this will be the sign that the overall markets are peaking.
Just look what happened to the markets in 1989 and 2007 – the subsequent crash is never pretty. But, it looks like we are a long way from that point.
Stephen Taub , who has covered the hedge fund industry for 30 years, is a contributing editor to Institutional Investor and Absolute Return-Alpha magazines.
