In a soft market for mergers and acquisitions, financial sponsors spent less money on leveraged buyouts in the first quarter. In fact, the period saw the lowest level of private-equity-backed buyout activity in two years, with total value falling 20% from the fourth quarter of 2011.

Private-equity firms are doing smaller deals. While the number of transactions — 669 — was in line with recent quarterly averages, aggregate value dropped to $46.3 billion, only slightly higher than a year ago. It’s “a clear indication of the growing prominence of smaller-sized deals in recent quarters,” says a report by Preqin, an alternative-asset information provider.

Small-cap deals ($249 million or less) constituted 82% of the transactions in the first quarter, says Preqin, up four percentage points from 2011’s fourth quarter. Deals are smaller and, instead of making big bets on platform companies, PE firms are acquiring “bolt-on” firms to integrate with existing portfolio companies. These add-on transactions made up 35% of all acquisitions last quarter.

“There has been a prolonged surge in add-on activity,” says the Preqin report. “With continued turbulence in the credit markets, it is likely we will continue to see small-cap and bolt-on deals fill the gap left by the large and mega-sized deals of the buyout boom.” That trend is in line with private equity’s aim to squeeze more value out of existing assets to earn its returns, instead of relying on leverage.

In a good sign for financial sponsors, more PE firms were able to exit investments compared with the fourth quarter of last year. Two hundred and eighty-three divestments worth $46.4 billion occurred, an 11% increase by dollar value. Those numbers were a drop from a year ago, however.

One egress that appears open to PE firms again is the public-equity markets. According to numbers from Dealogic published in The Financial Times on Wednesday, 36 PE-backed companies have gone public in 2012 so far, representing 35% of all initial public offerings globally. That’s the highest proportion since 2000. In the United States, 68 PE-backed firms are in the IPO pipeline.

Despite the trend to smaller transactions, PE funds continue to corral money from investors, Preqin says. Preliminary numbers for the first quarter show about $34 billion raised by private-equity funds globally, comparable with recent quarters.

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