Private equity deal volume sank to a five-year low in 2008, one of the industry's roughest years ever, and 2009 is unlikely to get any easier as firms struggle to find deals, keep portfolio companies above water, and pacify increasingly restless investors.
Global private equity activity sank to $188.7 billion this year, down 72 percent from 2007, Thomson Reuters data show, as the global financial crisis crippled banks' ability to lend for deals. Buyout deals were just 7 percent of total M&A volume - the lowest level since 2001 and a far cry from the boom years of 2005-2007 when giants such as Kohlberg Kravis Roberts & Co, Carlyle Group and Blackstone Group were striking multibillion-dollar deals on a regular basis. Buyout deals reached an all-time high of 20.5 percent of M&A volume in 2006.
As the economic malaise spreads, some of the deals agreed during the heady credit-fueled period look like increasingly bad ideas as companies are now saddled with high debt repayments at the worst time. Indeed, the last 12 months have been punctuated by buyout firms trying to extract themselves from ill-conceived deals. The biggest issue for the year ahead is retaining support from buyout firms' limited partners - the powerful pension and endowment funds that are their main investors. Return on funds spent during the boom could be hammered by portfolio company failures and deal blow-ups.
"The question is, how many limited partners will continue providing money?" said Steven Kaplan, a professor of finance specialising in private equity at the University of Chicago. "Historically, in markets like this they cut back, and it's precisely the time they shouldn't." Meanwhile, public appetite for investment in private equity has slumped. Shares of Blackstone are trading at around a fifth of their June 2007 initial public offering price of $31. That doesn't bode well for others aiming at the public market, such as KKR and Apollo Management.
"The demand for leveraged loans has been dramatically reduced and therefore the potential deal size has been dramatically reduced," said James Stynes, global chairman of mergers and acquisitions at Deutsche Bank Securities. "I don't see double-digit, billion-dollar deals coming back for quite a long while. We're much more likely to see the 2 to 5 billion dollar deals once markets fully open up".
DEAL WOES: Among the biggest buyouts clinched this year were the $3.5 billion acquisition of the Weather Channel by Bain Capital and Blackstone, and Carlyle's $2.5 billion take-over of consulting firm Booz Allen Hamilton Inc.
In terms of deal volume, the Americas held its dominance over Europe by a hair, accounting for 42.4 percent of buyouts, as opposed to 42 percent in Europe. The finance industry accounted for 25 percent of US private equity investments for the year, perhaps in a sign that funds saw opportunities to buy beaten-down companies.
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