Has Private Equity Returned to Historic Norms?

Private Equity (PE) transaction activity in 2013 has experienced a shift back to its historical pattern. Over the past twenty years the PE M&A transactions, both acquisitions and exits, in the U.S. have moved in congruence with PE capital raised except for the period 2010-2012. As the amount of capital raised has increased, so have PE transactions, and as the amount of capital raised has decreased, so have PE transactions. Although there is a correlation between PE transaction activity and PE capital raised throughout the full timeframe of 1995-2013 (R2=0.407, p=0.003)1,2, there is a significantly stronger correlation when the years 2010-2012 are excluded (R2=0.836, p<0.0001) 1,2.

The Great Recession put an emergency brake on transactions and capital raised. Acquisitions, exits, and capital raised dropped precipitously in 2009 as shown in the chart below. The recession coincided with a record level of capital raised ($922 billion) between 2006 and 2008. This extraordinary amount of raised capital coupled with the substantial decrease in activity created record levels of PE capital overhang ($441.4 billion) in 2009. The PE’s started to invest this pent up demand beginning in 2010 as the economy improved, and the renewed acquisition spree continued through 2012. Not surprisingly the PE’s also began thinning their portfolios during this same time frame. This was no doubt caused by their investors desire to have capital returned and the aging of their investments. In fact, the average hold time for portfolio companies increased from 3.84 years in 2008 to 5.37 years in 2012.  We would expect the hold period to decrease as the older funds exit their investments, and the new funds return target a shorter investment cycle.

As the chart illustrates, the relationship between PE transaction activity and capital raised has returned.  The wide disparity between activity and fund formation has disappeared. However, there is considerable uncertainty whether we have returned to a correlated relationship since one data point does not make a trend and there still remains a sizable capital overhang ($328.4 billion).

Looking at the chart we clearly see the bubble in capital raised during FY 2005-2008.   In the past five years capital raised has been above pre-2005 levels, but at 50% of the peak years.  If the capital raised remains stable this should lead to acquisitions maintaining levels below the past nine years.  We might expect to see portfolio exit volume exceed the acquisition activity as the older fund investments are divested. However, this all depends on whether we have returned to historic norms and relationships.

Source: S&P Capital IQ, Pitchbook, and PCE Investment Bankers

Market Activity

M&A activity increased 7% in the third quarter of 2013 compared to the second quarter of 2013. In terms of transaction volume, it was the best quarter in 2013 and the only quarter with total transaction volume above 2,100.

On a rolling 12-month basis through 3Q13, total transaction volume was approximately 9,400 deals, compared to the year prior which was more than 9,800. From a value perspective, of the deals that disclosed transaction values (~ 27% of strategic buyers and ~ 25% of PE buyers), the market observed an uptick in dollar volume. Total transaction value increased from $663 billion to $689 billion on a rolling 12-month basis through 3Q13 over 3Q12. While total transaction value increased, strategic value decreased to $599 billion on a rolling 12-month basis through 3Q13, compared to $613 billion for the same timeframe through 3Q12.


The increased level of M&A activity in the third quarter may continue throughout the fourth quarter and beyond due to the growth in the deal pipeline. The flurry of transactions closing last year to beat the tax increase led to reduced levels in the deal pipeline; however, it has steadily increased since then. Given the lead-time required to close M&A transactions, we expect that transaction volume will increase in the fourth quarter. Buyers will drive demand as a result of PE capital overhang, excess cash on corporate balance sheets, and a favorable debt market.


1R2 is a measure of how much of the variation between the two variables (PE transaction activity and PE capital raised) is explained by a simple linear regression. A high R2 value indicates that the linear regression explains much of the variation between the two, and therefore there is a strong correlation.
2P-value measures the probability that the observed (or more extreme) differences between the variables would be found if the null hypothesis were true. In this scenario, the null hypothesis is that PE transaction activity and PE capital raised are not correlated. A p-value of <0.0001 indicates that we can reject the null hypothesis with confidence.
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Michael Poole

Investment Banking
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