The COVID-19 pandemic continues to have a profound effect on the private equity industry. Not surprisingly, deal volumes, exits, and transaction multiples decreased and dry powder increased in the second quarter, reflecting the volatility and uncertainty surrounding both the economy and financial markets. Traditionally, we have measured private equity activity on a year-to-date basis. However, given recent events, it is more informative to analyze year-over-over second quarter activity, as it provides a better picture of how the pandemic has impacted the industry.
Second quarter 2020 deal volume, on both a global and North American basis, decreased significantly year-over-year. In North America, there were $31 billion of transactions in the second quarter of 2020, as compared to $56 billion in the second quarter of 2019 – a year-over-year decrease of 45%. Global deal volume in the second quarter of 2020 decreased approximately 40% year-over-year to $68 billion. Dry powder at June 30th set an all-time high of $796 billion, an increase of 6% from March 31st levels, reflecting lower deal volume. Average multiples paid in the second quarter of 2020 weakened to 9.3x EBITDA, down from first quarter levels of 11.2x EBITDA. Average leverage for buyouts in the second quarter of 2020 was 4.9x multiple of EBITDA, which was lower than the 5.3x multiple of EBITDA seen in the first quarter. Equity contribution as a percentage of total capitalization was at 46%, which is slightly higher than prior years but consistent with the first quarter. In the second quarter of 2020, the number of exits decreased approximately 49% year-over-year, with dollar volume decreasing approximately 77%.
Although we’ve seen parts of the U.S. and global economies begin to reopen in recent weeks, weak GDP, poor corporate earnings, and extremely high unemployment will have a long-lasting impact on private equity. While this pandemic is certainly unique – with extraordinary economic destruction – other dislocations have followed a similar long-term pattern, which results in lower deal activity, lower multiples paid, and fewer exits. When it comes to capital deployment for new investments, managers will continue to be cautious given economic uncertainty. When managers do pursue deals, we believe it will typically be at lower prices and valuations. Until we see stability in the markets and some degree of predictability in corporate performance, we expect to see muted activity across the private equity industry.
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For the first six months of 2020, year-over-year deal volume decreased 34% in North America and 35% globally.
Buyout dry powder at June 30, 2020 stood at $796 billion, an all-time record and a 6% increase from March 31st.
The first six months of 2020 were weaker year-over-year, with the number of exits decreasing 23% and dollar volume down almost 60%.
LBO multiples through the first six months of 2020 stood at 10.6x, which is an 8% decline from calendar 2019 levels.