Private equity environment continues to improve

The private equity deal market has been quick to rebound in 2011. According to Thomson Reuters, merger and acquisition deals are already over $36 billion for the year-to-date and the value of deals are up 88% from last year. Analysts not only expect private equity investments to continue but they also expect the size of deals to increase as well, since the credit crisis hindered the purchase of cheap debt. Although the entire private equity market has vastly improved over the past year, the investments leading the way have been in the industrial industries (including chemical & chemical related businesses), health care, and real estate.

If we measure the composition of global transaction volume, capital raising, the dollar value of private equity exits, and total equity investment. Collectively, these four key components illustrate the most fundamental elements of the private equity market, and when they are indexed, one can observe that in the 3rd quarter the global private equity industry continued to rebound from the 2008-2009 recession as total equity investment in private equity transactions increase to a record $40.1 billion ($36.4 billion reported in the 2nd quarter and $17.8 billion reported in the 1st quarter). However, PE activity has not yet returned to pre-recession levels and the industry is evolving for the better as many funds/PE firms are winding down their operations.

The biggest benefit of economic downturn is that private equity firms or companies tend to lose focus or ignore inefficiencies in go-go days. A few new private equity firms continue to emerge and a few existing firms will emerge even stronger, but many will go away. A generalist investment approach for very large funds might have some particular relevancies today (return of cheap money, access to resources due to larger fund fees/scale), while the middle-market (and certainly lower middle market) needs more specialized and focused investment approach because resources are limited and the middle-market contains structural inefficiencies that are absent from larger, more liquid markets. Isn’t this a good opportunity for both private equity investors and business sellers working with specialized professionals?