U.S. private equity activity continues to fall. Even if 2Q numbers are revised upward as time goes on, with additional data points back-filled, a quarter-over-quarter decline will still have occurred in 1H 2016.
As of early July, completed deal count for 2Q is more in line with the comparable period in 2013, signaling that the primary trends driving dealmakers to cut back activity are still in full force. Whether it’s a lack of quality opportunities, disconnects between buyers and sellers on price, longer due-diligence periods due to perceived risk of economic downturn or any of the other factors affecting PE investors, they all remain relatively in place. "Relatively," because some of those factors are prone to very slow shifts that are already ongoing, such as median market prices and dealmakers’ pipelines.
Valuations are already normalizing across much of the middle market, yet as capital overhang and the macroeconomic environment are also holding steady, it will take some time for them to decline and encourage investors to pick up the pace. The earliest this may occur is in the back half of 2016, but unfortunately, many signs still point toward ongoing stagnation in key areas, such as the U.S. Federal Reserve holding interest rates steady in response to a disappointing jobs report.
Given such persistence, it’s possible business owners in the core and lower middle market, where PE investors are increasingly active, will choose to come to market rather than endure any more prolonged uncertainty. Others hit harder than most in certain industries may court PE buyers to keep their doors open. Accordingly, buyout activity could rise somewhat, but that remains an open question.
What is more certain is the degree of the rise. If and when activity resumes, it's unlikely to be anything like the heightened clip of 2014 or 2015, but rather more akin to 2013.