BCG: PE war chests to prop up faltering M and A

Deal volume and value fell in the first half of 2016, but private equity’s growing firepower is expected to support future M&A activity, a report by Boston Consulting Group says.

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Following a boom in 2015, deal volume and value fell in the first half of 2016, but private equity’s massive war chest is expected to support future M&A activity, a Boston Consulting Group report says.

In its 2016 M&A report, the Boston-based consulting firm noted that after a “strong 2014 and a heated 2015,” when global activity neared all-time highs, the volume and value of deals declined significantly in the first half of this year: the value of global deals fell 27 percent compared with the same period in 2015.

However, private equity dry powder – the capital amassed by buyout firms that’s waiting to be deployed – rose to $479 billion by March 2016, up from $460 billion in 2015, and close to a high of $482 billion in 2008, when the financial crisis hit.

As private equity war chests have grown, buyout firms “still face the need to put their money into play”, BCG said, noting a 14 percent growth in M&A activity in the second quarter of 2016 over the first quarter of this year.

But buyout firms are facing record valuations in the race to acquire assets. In 2015 the median deal came in at an enterprise value-to-earnings before interest, tax, depreciation and amortisation multiple of 14, up from 12.5 in 2014 and significantly outpacing historical averages of about 12, BCG said.

“Multiples paid in 2015 were even higher than those at the peak of the dot-com bubble and just before the financial crisis,” the report said.

After three years of steady growth, global M&A value as a share of GDP reached 4.8 percent, one full percentage point above the long-term historical average. Similar warning signs, though admittedly at higher levels, emerged before the tech bubble burst in 2001, and financial markets collapsed in 2008, BCG said.

Despite all this, so far buyout firms have found ways to put their cash to work, striking around 5,000 deals in 20with a total deal value 28 percent higher than in 2014.

*Chart courtesy of BCG.