Focus on private equity – Number of deals falls despite rise in trade acquisitions

The number of private equity deals fell for the fourth consecutive quarter at the end of September, due to the scarcity in the number of quality businesses coming to market and to the lack of availability of debt funding, according to research by BDO LLP’s quarterly Private Companies Price Index and Private Equity Price Index.

During the third quarter of 2012, 77 private equity deals were completed, the lowest since the second quarter of 2011.

By contrast however, 466 trade acquisitions were completed in the last quarter, one of the highest numbers in the last two years.

“Interestingly, while deal volumes are moving in opposite directions, the multiples paid by buyers on both sides is converging,” BDO said.

During the period, private equity buyers paid an average price/earnings multiple of 13.3, up 11% from 12% in the second quarter.

“These figures show that cash-rich corporates are gaining ground by making strategic deals for growth and synergies whilst private equity deal flow is being hampered by the current funding environment,” said Peter Hemington, M&A Partner at BDO LLP.

He added that there has been a huge shift in private equity deal structures in the past few years where deals, which once typically comprised of 60% debt to 40% equity, are now funded by around 70% equity.

“Given that this structure relies more heavily on strong earnings potential to provide sufficient returns, private equity companies are struggling to compete with corporates on anything but the highest quality businesses – pushing up valuations on the deals that do get past the finishing line,” he said.

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