Buyout firms spent $38 billion in 203 acquisitions during the second quarter of 2005, bringing the half-year total to a record $77 billion-a 44% increase over the $54 billion first half total in 2004, according to Buyouts, a Thomson Financial publication.
The strong first-half performance maintains the momentum buyout firms created in 2004, when they completed a record $137 billion of control transactions. The first-half statistics were buttressed by a few multibillion- dollar deals, including the $4.9 billion purchase of Metro-Goldwyn-Mayer by the consortium of Providence Equity Partners, Texas Pacific Group, DLJ Merchant Banking and Sony Corp. And the second half should have plenty of its own megadeals, including the recently announced $5.1 billion purchase of Neiman Marcus by Texas Pacific Group and Warburg Pincus and the $8.8 billion buyout of Toys R Us by Bain Capital, KKR and Vornado Realty Trust.
Clearly, one of the main drivers of deal activity has been the record amount of fundraising activity during the past 18 months. Preliminary numbers from Buyouts as of June 30 estimate buyout fundraising at $79 billion for the first half, compared with $42 billion for all of 2004. Carlyle Group has closed two funds this year, finishing with $10 billion, while Goldman Sachs Capital Partners closed on $8.5 billion in the second quarter. (Both firms started their fund raising efforts last year.)
“With the economy holding up and so much capital available – from lenders as well as equity sponsors — we expect the current pace to continue throughout the rest of 2005, and potentially into 2006,” says Danielle Fugazy, editor of Buyouts. “The big concern right now is whether the upward pressure on pricing will have a negative impact on returns down the road. That risk is arguably greater as deal sizes increase.”
But it’s not just the large market that’s experiencing an increase in activity. Of the first half’s 203 deals, 83 were acquisitions of $500 million or less, while 61 were acquisitions of $200 million or less. “With so much capital focused on the middle market, even small companies are hiring investment banks and going through a formal auction process,” says Adam Reinebach, vice president with Thomson Financial and publisher of Buyouts. “Not surprisingly, this trend makes proprietary deal flow tougher to achieve, and thus adds pressure on private equity firms to maintain even stronger relationships with intermediaries.”
Other trends to watch during the rest of 2005 are the participation of hedge funds-as both lenders and equity providers-the popularity of recapitalizations and the lack of renewed focus on sector specification.
Buyouts is a biweekly Thomson publication and web site that tracks private equity-backed buyouts. Its quarterly deal numbers incorporate control transactions by U.S. buyout firms and foreign buyout firms with a U.S. presence. Deal volume is tabulated based on disclosed or known values only, which means deals with undisclosed or unknown values do not affect our totals. The preliminary fund raising totals track U.S. buyout and mezzanine funds.