Analysis: Deloitte study points to more club deals, add-ons and further specialisation

Private equity and strategic-driven merger and acquisition activity is expected to increase in 2015, according to Deloitte’s M&A Trends Report 2015.

Deloitte’s second annual survey of 2,500 buyout dealmakers and US corporate executives found that merger activity is anticipated to remain robust, with acquisitions, divestitures, exits and perhaps most surprisingly, “club deals” expected to comprise M&A transactions in 2015. Ninety four percent of general partners and 85 percent of business executives surveyed anticipate that M&A activity will remain strong in 2015. 

“While the economy is not growing the way people would like, it’s fairly stable, financing is cheap and plentiful, and the equity markets are strong. We’re seeing strong deal flow across our entire practice, including among private equity and strategics,” said partner in transactions at Deloitte, Barry Curtis.


The survey found a marked increase in expectations for private equity groups to band together as a “club” to do deals this year. For example, the study found 71.3 percent of financial sponsor respondents expected to execute more club deals in 2015, whereas only 28.7 percent thought there would be fewer such transactions this year.

However, according to a partner at The Abraaj Group, the projected growth of club deals is likely to remain among the biggest players, and within the most mature private equity markets. 

“The idea of club deals has gained much more acceptance in recent years, particularly at the top end of the size range in developed markets, for obvious reasons,” said Tom Speechley, a partner and head of global markets at The Abraaj Group. 

“[But] there’s much less need for them in the growth markets. In fact aside from one we announced recently with TPG in casual dining in Saudi Arabia, we rarely look at that option,” he said, adding “there’s just less need to do it when you are focused on proprietary mid-market growth deals.”

Abraaj and TPG announced the completion of their joint investment in Saudi Arabian restaurant group Kudu in April.

Deloitte’s survey respondents anticipated that dealmaking would be active across many sectors, including technology and healthcare, while transactions would be evenly spread across small cap, mid-market and large cap segments. 

If 39 percent of corporate respondents surveyed offer any indication, companies are going to provide fuel to the M&A market through divestitures. A greater focus on streamlining operations is helping drive this activity, according to Steve Joiner, a partner at Deloitte. “That’s enabling companies to take advantage of the market and get capital to deploy in their core business and strengthen their position.”


When it comes to the types of deals that are expected to be done, more than half of private equity respondents anticipate making more than five add-on acquisitions (22 percent indicated they expected to execute more than 11 add-on deals). 

James Marden, a managing director at SK Capital told PEI: ‘“Add-ons can create incremental value in a platform investment” and help with “achieving other strategic initiatives.”

North American private equity groups that have utilised add-ons this year include Audax Group, Bregal Partners, Genstar Capital, Trivest Partners, and The Jordan Company.

Meanwhile US private equity sponsors are sitting on $531.1 billion in dry powder, according to the latest information from PitchBook Data.

The survey also found strong expectations for more realisation events, with about 75 percent of general partners anticipating an uptick in their number of exits over the next 12 months. Within private equity, 62.3 percent of buyout group respondents indicated that they expect a strategic sale will be the primary form of portfolio exit, while 37.7 percent said they expected to harvest an investment through an IPO.


Results from the study also reflected the increasing importance of industry specialisation for the buyout industry in recent years. Close to three out of four private equity respondents in the Deloitte survey said their investments are creating more industry-specific portfolios, rather than being made up of diverse types of businesses.

Béla Szigethy, Co-CEO of The Riverside Company, said the firm’s focus on specific industries like healthcare, for example, enables it to acquire lower middle market companies that it would otherwise not be able to buy. “Our industry knowledge and expertise allows us to recognise patterns, competitive factors, growth opportunities and risks that naturally steer us towards or away from investments, including being able to offer higher purchase multiples while generating our historic returns.”

It’s hardly a secret that strong valuations offer a compelling value proposition for financial buyers seeking to harvest investments through M&A trade sales. 

Transactions aren’t expected to be entirely domestic in nature in 2015. For instance, 85 percent of financial sponsors indicated that they expected to pursue M&A with a company domiciled in a foreign market as compared with 73 percent a year earlier. Among strategic acquirers, 74 percent indicated they are pursuing foreign M&A deals, compared with 59 percent last year.

In spite of the sanguine outlook by both corporate and financial buyers, the Deloitte study found that both strategic acquirers and private equity groups expressed disappointment when it came to their return on investment from M&A activities. Ninety percent of corporate respondents said that their completed transactions fell short of generating the returns they’d expected, while 96 percent of financial buyers noted their deals also fell short when it came to meeting return targets.

Deloitte polled 2,500 US corporate and private equity executives (2,092 business executives and 408 financial sponsors) between January 2015 and February 2015 about each group’s expectations for M&A activity in the coming year. The private equity portion of survey respondents was comprised of 38 percent of firms that controlled funds totaling less than $500 million; 43 percent with funds of assets between $500 million and $3 billion; and, 18 percent from funds with more than $3 billion in investments.