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ANALYSIS: Private Equity’s Share of U.S. M&A Market Down in Q3

Oct. 10, 2019, 10:46 AM

Private equity deals claimed a smaller share of the U.S. M&A market in the third quarter, dropping from 25% in 2018 to 20% thus far in 2019.

Private equity M&A sales continued to outpace private equity buyouts, but both were lower in dollar volume through third quarter this year compared to 2018. Mega deals have slowed compared to last quarter. Overall, targets from the consumer, non-cyclical sector were still the most popular in the U.S., possibly serving as a refuge as economic concerns rise.

Lowest U.S. M&A Third Quarter Volume Since 2012

Following the second quarter’s mega spike in deal volume, the dollar value of U.S. mergers and acquisitions in the third quarter of 2019 dipped to the lowest level since the first quarter of 2017. Buyers in the third quarter announced an aggregate of $272 billion in public and private M&A deals valued at $100 million or larger.

This year’s third quarter had the lowest deal volume of any third quarter since 2012. The deal count was also low, with only 244 deals valued at $100 million or more—the third-lowest deal count for any quarter since the first quarter of 2016.

Mega Slow Down

Five mega deals, valued at $10 billion or greater, were announced in the third quarter. This number represents less than half of the number of mega deals announced in the U.S. last quarter. By volume, the mega deal market shrank by 74%, from $407 billion in the second quarter to $104 billion in the third quarter. The withdrawn Altria Group, Inc. – Phillip Morris International, Inc. deal, which was expected to be announced in the third quarter, was valued at $95.3 billion.

The decline in mega deals resulted in a 54% drop in average U.S. M&A deal size, from $2.4 billion to $1.1 billion in the third quarter. Given the size of the scrapped Altria deal, arguably the vaping public health crisis single-handedly caused the third quarter’s average deal size to lose nearly half a billion dollars. If the deal had not been withdrawn, average deal size for the third quarter would have been $1.5 billion rather than $1.1 billion.

By volume, the large market (deals valued between $1 billion and $10 billion) also shrank significantly, losing 33% of its value over the last quarter: from $159 billion in the second quarter to $107 billion in the third quarter. The middle market (deals valued between $100 million and $1 billion) suffered the least, with a loss of 4% in volume from second to third quarters.

Private Equity Deals are One-Fifth of the M&A Market

Twenty percent of all U.S. M&A deals announced in 2019 through the third quarter involved private equity parties. These deals included those involving private equity sellers (PE M&A exits), private equity buyouts, and other deals involving private equity parties.

While a one-fifth slice of the U.S. M&A market, representing $268 billion dollars in announced deals through the third quarter, is a large one, private equity’s share was greater last year. In 2018, one quarter of the M&A deals announced in the U.S. were private equity deals. If 2019 private equity volume fails to catch up to last year in the fourth quarter, 2019 will be the second year of this downward trend.

PE Sales Outpacing Buyouts

Private equity sales and buyouts both dropped in volume from the second quarter to the third quarter. In the third quarter, $52 billion in M&A deals involving private equity sellers were announced, compared with $62 billion in the second quarter. Private equity buyouts totaled $23 billion in announced deals in the third quarter, a fall from $44 billion in the second quarter.

M&A deals involving private equity sellers have consistently achieved a larger deal volume than private equity buyouts in recent years, and 2019 is on track to continue this trend.

With one quarter remaining, 2019 private equity sales and buyout volumes do not seem likely to reach their 2018 levels. Last year may have been a peak volume year for both private equity sales and private equity buyouts.

Consistent with the overall decrease in private equity’s market share, the percentage that private equity sales and private equity buyouts represent, respectively, have also fallen steadily since 2017.

Consumer, Non-Cyclical Targets Top M&A and PE

In 2019, U.S. M&A buyers preferred the consumer, non-cyclical sector, with $575 billion in deals announced through the third quarter representing 31% of all U.S. M&A. Consumer, non-cyclical targets were also the most popular for private equity deals, with 24% of 2019’s deals in that industry. With the current recession fears increasing, traditional sectors that offer non-cyclical income may offer opportunity with somewhat less risk.