Private Buyers Worried about Future M&A

While nearly all dealmakers view the current global merger-and-acquisition environment as good or excellent, a survey by the Association for Corporate Growth and Thomson Financial finds growing worry among private equity professionals that M&A is now suffering from a tightening debt-financing market. And they expect things to worsen.

Among the PE-related findings were that "the days of easy financing may be ending," a press release from ACG and Thomson said, with 68 percent of respondents saying they saw a worse debt market developing over the next year, and only 11 percent saying it would be better. The other 22 percent saw conditions remaining unchanged.

The survey polled 1,011 investment bankers, PE professionals, corporate development officers, and lawyers, accountants and other service providers involved in dealmaking. ACG and Thomson noted the record pace of global M&A, with $2.7 trillion in first-half deals worldwide.

"With increasingly active corporate acquirers with global ambitions, financial acquirers raising large new funds and quickly making substantial investments — and dealmakers of all types doing more cross-border deals — I am confident that we will shatter all M&A records this year," ACG president Daniel A. Varroney said. Still, the overall tone of the survey was cautionary because of the sense that PE investment has peaked.

Across M&A, results showed 75 percent of respondents calling it a sellers' market, as opposed to 13 percent labeling it a buyers' market. Top M&A drivers, in order, were listed as "hefty capital reserves of some acquirers" (43 percent); "good multiples for companies being acquired (20 percent) and historically low interest rates," cited by 13 percent.

The hottest M&A sectors were technology (23 percent), healthcare and life sciences (17 percent) and manufacturing and distribution (15 percent.) Half of dealmakers expect to be involved in an international cross-border deal during this year's second half, and 39 percent say such deals are becoming more important to their firms, with top areas for dealing being Western Europe (49 percent), Canada (40 percent), and China (34 percent.)

PE-based respondents identified the greatest opportunities for gaining portfolio liquidity as sale to a strategic buyer (50 percent), sale to a financial buyer (32 percent), merger (8 percent), and initial public offering (6 percent.) The acceptable lowest internal rate of return was 21 to 25 percent, in the view of more than a third of respondents, with another quarter of respondents citing the acceptable lowest rate at between 16 and 20 percent.

The greatest threats to private equity seen in the survey were lower returns (33 percent), competition with other private equity firms (23 percent), and regulatory scrutiny (14 percent.)

Still, PE professionals said 78 percent of their portfolio companies were operating above prior-year performance levels in revenue, and were 55 percent above plan, while 73 percent were above the prior year in cash flow, with 51 percent being above the cash-flow plan.

In the area of organic growth, respondents saw healthcare and life sciences (32 percent) taking the lead as the hottest growth sector, followed by energy (25 percent) and technology (15 percent.) Potential growth impediments listed were interest rates (37 percent), energy costs (21 percent), inflation (12 percent), terrorism or war (11 percent), and labor costs (10 percent.)