US Private Equity Activity Slows in Q2 2020 As Global Economies Struggle Through COVID-19 Pandemic
July 10, 2020
SEATTLE – July 10, 2020 – PitchBook, the premier data provider for the private and public equity markets, today released its 2Q 2020 US Private Equity Breakdown, which found the velocity of US PE investment activity further diminished in Q2 2020 as dealmakers felt the impact of the coronavirus pandemic. In fact, many GPs sought to pull out of previously agreed upon deals, sometimes invoking the material adverse change (MAC) clause. Of the deals that were completed, a high proportion were add-ons and subsequently smaller than platform deals on average causing add-ons to have comprised the highest percentage of LBOs on record. On the exits front, activity collapsed to an even greater extent than deal activity as PE firms sharply marked down portfolio companies and chose to hold investments rather than sell. After a rebound in public markets, exit value was assisted by a couple outsized IPOs while sales to strategics or other financial sponsors lagged. PE fundraising momentum will likely remain healthy, despite a slowdown from 2019’s record-setting pace, with several mega-funds closing in the quarter. The department of labor also issued clarification on rules around including PE funds in diversified funds – such as target date funds – within 401(k)s. But any changes to target date funds are likely to take years and the PE will only account for a minor share, meaning access to retail accounts may not be the spark that some GPs had been hoping for.
To download the report and underlying data, click here.
“Following the first full quarter where global economies experienced the impacts of the COVID-19 pandemic, many PE firms are in triage mode and trying to determine which portfolio companies to save, rather than looking to sell,” said Wylie Fernyhough, senior PE analyst at PitchBook. “There are still a lot of uncertainties as to what the coming quarters will hold, but PE fundraising remained healthy through the first half of the year. A couple mega-funds launched in Q2, exhibiting confidence that LPs will find success despite the challenges brought on by the coronavirus, but the same cannot be said for nascent managers.”
Through the first half of 2020, US PE dealmaking decelerated with 2,173 deals closed totaling $326.7 billion, a nearly 20% decrease in deal value compared to this time last year. Quarterly figures show an even steeper fall, with Q2 2020 deal value down more than a third from Q1 2019 values.
PE firms had to get creative with dealmaking, turning to PIPEs and divestitures because traditional sources of deal flow have dried up. For instance, sponsor-to-sponsor transactions (or secondary buyouts, SBOs) have slumped to their lowest levels since 2009 and median buyout size dipped for the first time since 2015.
US PE firms closed 392 exits totaling $134.8 billion through the first half of the year with a couple of massive IPOs driving much of the second quarter’s exit value. Announced global PE exits were down approximately 70% in May 2020 compared to May 2019 following a steep falloff in portfolio company valuations and GPs struggling to value companies in such a chaotic time, preventing potential sales.
One notable exit from the second quarter was ZoomInfo (NAS: ZI). The company raised nearly $1 billion in the offering and nearly doubled in price on the opening day, putting its market cap around $15 billion. TA Associates paid $90 million for its stake in 2014, which is now worth north of $6.2 billion, the largest paper gain in the firm’s history. Carlyle also achieved an outsized return, collecting 13 times its investment in a little over a year.
Several portfolio companies fell victim to heavy debt loads and the crisis, forcing bankruptcy. Many of the names, including J.Crew, Nieman Marcus, 24 Hour Fitness, and John Varvatos are in the retail arena as physical retail struggled to remain afloat during the pandemic.
By quarter’s end, US PE fundraising activity posted healthy figures, bringing 1H 2020 totals to 101 funds closed accumulating $101.6 billion and putting 2020 on pace to approximate 2018’s total capital raised figure. Despite the coronavirus halting business travel and forcing digital due diligencing rather than in person, PE firms raised more capital in 2Q than in 1Q when these restrictions were largely not present.
The second quarter saw several tech-focused investors either launch fundraises or close funds, though perhaps none were more impressive than Francisco Partners. At an almost unheard-of pace, the firm officially launched fundraising and concurrently held final closes on three funds totaling $9.75 billion within six weeks in Q2.
Special purpose acquisition companies (SPACs or blank check companies) had their most active quarter on record. PE firms, VCs, and hedge funds have been turning to SPACs with success recently to close deals. SPACs can help inexpensively take sponsor-backed companies public but increasingly may be competing with other PE firms for deals, such as a new blank check company looking to buy a “mature unicorn.”
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