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Q1 League Table: Covid Reshapes PE Deals

By Steve Gelsi | Published on April 30, 2020

The emphasis in PE dealmaking has shifted to refinancing struggling portfolio companies and M&A in healthier sectors.

The economic shock caused by the Covid-19 pandemic impacted private equity M&A deal-making in a big way in the first quarter of the year.

The threat of recession and a deep drop in travel and other activity shaped 2020’s opening three-month period and will continue to do so in the second quarter.

As the quarter came to a close, the Dow Jones Industrial Average cratered to the low 20,000 range, down roughly a third from the record 29,551 set on Feb. 12, the U.S. Congress passed a $2.2 trillion stimulus package, and the economy remained on lock-down to “flatten the curve” of the outbreak.

This all had a huge impact on private market deal-making in the quarter.

You wouldn’t know that from deal count, as transactions already in the pipeline appeared to reach the finish line despite the upheaval.

The Deal’s database reports 497 M&A transactions in the U.S. including leveraged buyouts, secondary buyouts, management buyouts, take-privates and investor group acquisitions as of March 26. That figure compares favorably to 507 deals in the corresponding time frame in 2019, or 529 deals for the full first first quarter of last year.

Some of the major deals in the latest quarter included the $14.3 billion take-private of broadband supplier Zayo Group Holdings Inc. by EQT Partners and Digital Colony Management LLC, which closed on March 9; Blackstone Group Inc.’s (BX) Feb. 26 announcement to buy iQ Student Accommodation from Goldman Sachs Merchant Banking and Wellcome Trust for $6 billion, and Intuit Inc.‘s Feb. 24 agreement to acquire Credit Karma Inc. from Silver Lake Partners LP for $7.1 billion.

As concern about Covid-19 took hold, however, bankers, lenders and advisers who work with PE firms quickly switched gears from sifting through multiple bids on deals to providing emergency financing, hitting the brakes on pre-market processes to let the dust settle and adjusting seller expectations, especially in hard-hit sectors such as retail and leisure.

“Bankers are working harder than they ever have,” said Cole Bader, managing director, co-head of the global technology group, and head of M&A at Stifel Financial Corp. “We’re hand holding, helping out with financing, going to board meetings at portfolio companies and interacting with clients.”

After broadening its tech practice with an acquisition last year, Stifel started out the year with record activity in the sector. But now some sales processes that were in the early stages are shifting into limbo as deal-makers ponder the impact of publicly traded comps on valuations, he said.

Private equity firms with little pressure to sell are sitting it out for now. Health care and tech deals remain relatively robust. For example, Stifel worked with Evercore Group LLC on the sale of Checkmarx Ltd. to Hellman & Friedman LLC for $1.15 billion in a deal announced on March 16–a particularly dramatic week for negative Covid-19 developments.

But many consumer-facing companies are now seeking financing to wait out the storm, if not facing restructuring processes, he said.

The industrials sector “falls into the middle” between the disrupted and relatively healthy sectors, with some deals showing strength, he said. But tightening in the credit markets is slowing down many of these processes as well, he said.

Deal-makers are still trying to figure out the effect of the $2 trillion stimulus package and how that may help the financing picture.

Despite the problems in the M&A arena, Stifel has yet to see a significant number of deal terminations, but financing terms are often getting a closer look as transactions move toward financial close.

It’s also harder to get to the finish line on due diligence because face-to-face meetings remain an important part of the process, and those are mostly on hold for now.

Overall, the usual lag time of six-to-nine months between drops in public valuations and adjustments in private valuations during past economic downturns has narrowed. Buyers and sellers aren’t as far apart as they would normally be.

“People are digesting it really fast,” Bader said. “That may help deals still happen.”

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