Mega-deals contrast mid-market drought

US private equity in 2013 has been a tale of two markets.

The mega-buyout sector got off to a fast start with Silver Lake’s $24.4 billion take-private of PC manufacturer Dell and 3G Capital’s purchase of Heinz for $28 billion alongside Berkshire Hathaway, both of which were announced in February and helped fuel predictions of a return to mega-deals. 

Activity in the US mid-market, however, was virtually non-existent during the first two months of the year. Indeed, Silver Lake and 3G Capital’s mega-deals accounted for 99.2 percent of all US buyout deal values through the end of February, according to Dealogic.

“It was a very slow start in January and February,” said Randy Mehl, partner in Baird Capital’s US buyout group.

Though the first quarter is typically marked by a lull in buyout activity, an anticipated increase in US tax rates on 1 January motivated some sellers to complete deals last year that otherwise would have transacted in early 2013, according to Dana Schmaltz, partner at mid-market firm Yellow Wood Partners.

“Part of it is a little bit of a hangover from the rush to get things sold in 2012,” he said.

While mid-market deal activity stalled during the first two months of the year, debt continues to be readily available for buyouts.

“What’s happening in our world that’s unusual is the financing market up to now has been so strong,” said managing principal at The Jordan Company Adam Max. “That’s partly what’s helping the big deals.” 

Renewed confidence in the debt market also bodes well for US mid-market buyout activity in 2013, which many GPs

still expect to outpace 2012 despite the slow start. 

Roughly 57 percent of fund managers in a recent survey from accountancy and advisory house BDO said they anticipate closing between two and four new deals in 2013, compared to 47 percent that completed between two and four investments in 2012. While a minority of fund managers – 36 percent – expect to close more than four deals this year, only 7 percent of GPs forecasted closing more than four deals in 2012.

“There are some good indications that there will be some nice opportunities this year,” said partner in BDO’s transaction practice Ryan Guthrie. “It may not be a ‘knock it out of the park’ year, but I don’t expect it to be a bad year and it could be a pretty darn good one.”

One of the main drivers of US deal activity in 2013 is expected to come in the form of private equity firms selling portfolio companies to other buyout shops, as 64 percent of GPs said private equity exits would be a “key driver” of deal flow this year. Secondary buyouts – when a company passes from one private equity firm to another – have produced returns as good as, or at times superior to, primary acquisitions, according to recent research from Boston Consulting Group. 

“I do think that 2013 is going to be a very active year for mid-market buyouts because you’ve still got a steadily improving economic environment,” says Baird’s Mehl. 

“Nobody would say it’s great, but it’s stable and it’s improving.”