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The PE Industry: US Review

As executives reshaped companies to cope up with the fallout caused by the COVID-19 pandemic, the US PE industry saw a resurgence in mergers and acquisitions (M&A) activity leading to the busiest summer for top deals. This happened as financial sponsors and corporates turned to the middle market to complete deals in Q3 2020.

Some firms have been involved in M&A activity to stay afloat during uncertain times, while others pursued M&A to take advantage of the opportunities presented by the pandemic. According to the global co-head of M&A at JP Morgan, Dirk Albersmeier, the pace of the rebound in M&A activity in the third quarter surprised everyone.

Also, the co-head of investment banking at Goldman Sachs, Gregg Lemkau, stated that he wouldn’t have believed if someone told him mid-march that the business will perform this well during the pandemic.

To know more about the PE industry, here is an in-depth review of the US PE industry.

Overview of M&A Activity

The COVID-19 pandemic still has a strong footing in the US. With business uncertainty, and no plan to reopen the economy, you can’t rest assured that the recovery will continue. To make things worse, local and state tax revenues have declined significantly, which will only cause further decline in the economy.

Yet, in the third quarter of 2020, deal activity surged to 2,714 deals with a combined value of $361.1billion. These were the first gains in deal count and value since the start of the coronavirus pandemic in Q4 2019. The public markets, in particular, demonstrated strong performance. In the third quarter, the 8.5% increase in the S&P 500 marked the best Q3 gains since 2010 and S&P's best back-to-back quarter since 2009. Corporates and PE firms were busy signing deals, with many of the former ones looking to benefit from the booming markets before an expected return to volatility after the November US elections.

Let’s now examine M&A activity by sector:

M&A Activity by Sector

While both financial sponsors and corporate acquirers undertook transactions, they targeted certain sectors. For instance, according to the latest insights, corporates enhanced their proportion of deals in the B2C space, while private equity sponsors focused more on tech and healthcare deals. Plus, as PE firms invested more in financial services companies, financial sponsors completed 31.7% of financial services M&A transactions, marking the highest proportion since 2016.

Currently, the healthcare sector has 13.1% of the total 2020 deal count. That's the highest proportion ever recorded, which could have resulted from the pandemic. Some of the independent healthcare operators who experienced financial pressures triggered by a decrease in elective procedures resorted to acquisition for their survival. A clear example of such a deal is Prime Health Services’ purchase of St. Francis Medical Center for $350 million. Owing to fierce competition from organizations with robust negotiation power and greater economies of scale, this California-based healthcare provider had been facing a hard time for years. Based on expert predictions, more operators are expected to turn up at the deal table to merge for survival.

On the other hand, the decline in the energy sector triggered by the coronavirus pandemic continued through the third quarter. The sector made its lowest contribution of 1.5% of total deal value in Q3, majorly caused by the drastic decrease in energy prices. In response to this drop in oil prices, many US and Canada-based oil firms quickly reduced their capital expenditures, output, and count of oil rigs. By the end of the third quarter, the number of oil rigs in the US decreased by a staggering 65%, over 500 rigs down from the last year’s count. A recovery in the energy sector looks unattainable unless the pandemic situation ends globally.

The rebound in the M&A activity is also largely attributed to software deals. GPs have started viewing high-tech firms as resilient to economic downturns. As a result, the recurring profits of B2B SaaS companies have become highly sought-after commodities. To obtain a better idea of how willing PE firms are to invest massive bucks in certain software firms despite the pandemic, consider the example of the $4.3 billion buyout of 'Logmein', a Boston-based IT company, by Francisco Partners and Evergreen Cost Capital. The purchase price offered a 25% premium to the organization's closing share price as of September 18, 2020.

Deal Activity by Type

Despite these large M&A deals, deal activity was dominated by smaller transactions. Accounting for 68.7% of all M&A activity, the deal under $100 million touched their highest proportions since2016. In contrast, deals ranging between $1 billion and $5 billion made this bracket's lowest contribution of 1.2% since 2013.

Moving on, the public markets have been subject to divergence in the case of Russell 2000 and S&P 500, where the former suffered declines, and the latter realized gains. Investors and GPs have exploited struggling firms to invest in undervalued, yet attractive assets. This trend should reverse as the economy recovers and GPs regain confidence in the economic outlook.

Final Word

In summary, the US PE industry still has a very uncertain outlook. Even with a viable vaccine on the horizon, there seems no end in sight for the pandemic. Plus, there’s a big question mark from the market outlook perspective. However, a rebound in M&A activity in Q3, despite the persistence of the pandemic, is a positive sign.

It's important to note here that the November US elections can be a huge factor in the recovery and the US PE industry can greatly benefit. Even though Joe Biden has defeated Donald Trump, we’ll keep weighing the possible implications of election results for the PE industry as the events unfold.

If you found our review of the US PE industry insightful, stay tuned for more updates.

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