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Q4 Flash Report: PE Cautiously Regains its Footing

By Steve Gelsi | Published on December 23, 2019

While private equity deal-making in 2019 faced a few bumps in the road, the fourth quarter wrapped up a particularly strong showing for GPs and advisers that worked with them.

Stephanie Teicher, partner, Skadden, Arps, Slate, Meagher & Flom LLP, Skadden, and co-head of the firm’s private equity group, said 2019 ended up roughly as busy as 2018, despite a short lull in deal-making late in the third quarter and choppiness in the market for initial public offerings.

“It definitely was a strong year for private equity,” Teicher said. “There were a lot of deals in a  lot of different sectors. We also saw good fundraising from big-name sponsors, which is a positive sign for deals in the New Year. We saw a lot of dry powder getting used in 2019 and there’s a lot to go in 2020.”

The credit markets remained favorable as well. Healthcare, SaaS, insurance sector deals and fintech drew strong interest. Exits from PE firms were less bullish, however, due to weak performances from some new issues in the IPO market.

“For the real quality assets, there were very competitive processes and multiples were high,” Teicher said. “I did see a lot of sponsors try to preempt auctions but ultimately most sales processes played out.”

Karen Davies, a managing director in the sponsor finance group of Huntington Bancshares Inc. (HBAN), saw a greater emphasis on add-on deals for platforms in 2019, partly because of a tight employment market.

“It’s a challenge to find skilled labor—it can affect your ability to grow at the pace you want grow,” Davies said. “Finding labor is really hard. When I’m driving around Detroit I often see billboards advertising for skilled labor.”

Ethan Vogelhut, head of buyout investments Americas, at Schroder Adveq Management AG, said the firm saw more sector specialists in the fundraising market seeking to do deals in niche industries such as SaaS and healthcare.

“GPs need to bring a unique skill set to deals to create value in companies,” Vogelhut said. “One way you do that is by knowing the industry really well. We expect to see the growth of firms that are more specialized by industry.”

The firm continues to favor health care investments as a relatively safe sector in a potential economic downturn ahead.

“Health care is not going anywhere,” Vogelhut said. “It’s a massive but inefficient sector that is consolidating and seeking ways to take costs out of the system for patients while still delivering the best care. Private equity is playing a big part in that process. We do like that space.”

 

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