The Boston Consulting Group recently released its latest review of the global mergers and acquisitions market – and as far as private equity is concerned, it contains plenty of reasons to be optimistic.
BCG has been running its analysis since 1990, so it provides some useful historical context for the current state of the market. And as far as this year is concerned, the picture is broadly positive: total M&A value was up 62 percent in the first half of 2014 relative to the same period in 2013, driven particularly by some huge deals in North America’s booming tech market and (to a lesser extent) by the growing popularity of so-called ‘inversion’ deals, which allow a company to move its corporate domicile to a more tax-friendly location.
What’s more, the consultancy believes that given current market conditions – specifically large corporate cash reserves, the general bullishness of investors and the continued buoyancy of the debt markets – there’s every indication that we’ll see a “continued resurgence” of M&A activity in the coming months.
So what of private equity’s role in this resurgence? Well, clearly all of these factors should benefit private equity too. BCG estimates that the industry’s cash reserves globally now stand at around $431 billion – the highest total since 2009, and not far behind the 2008 peak of $482 million. That clearly points to bullish LP sentiment.
It also helps that debt markets have bounced back almost to boom-era levels, according to BCG, with EBITDA multiples hovering just below the 9x mark and average equity tranches back down to 35 percent. In fact, its figures suggest that covenant-lite debt issuance (of the new issue first-lien kind) smashed all previous records last year: as per the chart above, last year’s total topped $250 billion in the US and Europe, when even at its previous peak in 2007 it was less than $100 billion (Fig. 1).
And the other positive sign is that investors are starting to favour a more aggressive approach to acquisitions at all these cash-rich corporates. According to BCG’s most recent investor survey, around 60 percent of investors now favour a more aggressive approach, almost triple the equivalent figure from 2012 (Fig. 2). That’s good news for GPs looking for some strategic interest in their portfolio sales.