I was recently honored to participate in the Alliance of Mergers and Acquisitions Advisors’ annual M&A Market Update Panel. We had a lively conversation on where we saw the industry moving and if there was a recovery in sight. We unanimously concluded that, based on the high cash reserves of strategics and the overwhelming capital overhang in the private equity universe, this was going to be a banner year for corporate transactions. On the private equity side we see approximately $450 Billion in total unfunded commitments, with just under $232 Billion from the vintage years 2006-2008. If you lever this up 3.3x we’re looking at about 3/4 of a trillion dollars in deal flow over the next 2 years. Considering 2007, the most active year in Private Equity, saw $570 Billion in deal flow, the next two years will challenge that top spot.
With me on the panel were Steve Brady (National Managing Partner of Grant Thornton’s Transaction Advisory Services (TAS)), Graeme Frazier (Founder and President of Private Capital Research LLC), Charlie Welsh (Co-founder of Mergermarket) and Andy Schmucker (Managing Director, Head of Strategic Advisory, Head of Financial Sponsors Coverage for Janney Montgomery Scott LLC)
The exit activity will be high as well. With the typical hold period for portfolio companies around 4.5 years, much of the inventory is ripe for exit. The chart below illustrates the over 4,000 companies that have been held for 4 or more years.
The main challenge we all agreed on was the relative lack of availability of debt, the “L” in LBO. However with the increasing spreads, subordinated and mezzanine debt providers are coming into the market to fill the void, and we expect to see this fuel the resurgence.