A PitchBook Look at 3Q 2012: Exits and Fundraising Healthy, But Deal-Making Lags

PitchBook’s recent report on 3Q activity in the PE world provided a good news/bad news kind of experience.

First the good: exits and fundraising are two relatively bright spots for PE investors. While “capital exited slipped following a record-breaking 2Q…the 143 deals executed in 3Q 2012 (were) a slight improvement in line with the recent trend, according to the report.

Meantime, PE firms closed 28 funds with a total of $35 billion, the report stated. That figure was down slightly from the previous quarter, but “3Q still registered the third best fundraising total in the last three years,” according to PitchBook.

Now the bad. PitchBook captured that in the report’s initial sentences: “Private equity continued to falter in 3Q 2012, with firms closing 362 deals totaling $59 billion. The quarter marked the third consecutive quarter of declines in PE activity and was the slowest quarter for deal-making by volume and capital invested since 2009,” the report said.

Pitchbook projects that at the current pace 2012 will be the slowest year for PE deal-making since 2009.

Impressive growth in activity during 2010 and 2011 had suggested a stronger performance in 2012, according to the report.

“However, it is difficult to believe that PE firms can continue with these low levels of investment much longer,” the report said.

A significant downtick in big deals now means that transactions of less than $100 million now represent 68% of deal flow, up from 63% last year. The core middle market, defined as deals between $100 and $500 million, continues to be the “heart of PE deal-making,” representing 44% of PE capital invested.

According to the report, add-ons continued their steady increase as a percentage of buyouts over the last several years.

“Add-on deals have long been looked to as a means of increasing the operational capacity of portfolio companies, but now firms are increasingly viewing add-ons as a viable way to put capital to work as well….This trend is expected to continue as PE firms continue to seek out creative ways to grow portfolio companies and invest their fund’s dry powder.”

In the 3Q, the Business Products and Services industry led the way with 33% of PE deal flow, and the Midwest led PE deal-making with 24% of activity, the report stated.