Since early in the first quarter of 2011 it has been our view that the spike in activity during the fourth quarter of 2010 was not a return to better days but a result of expectations that the Bush tax cuts would be allowed to expire. The Private Equity Breakdown report issued by PitchBook earlier this month lends credence to our theory as it reflects a marked decline in activity compared to the fourth quarter of 2010.
One probably wonders how we arrived at our view of the state of the market. Actually it’s quite simple. During the unprecedented “go-go” year of 2007 our firm probably received two to three tombstones a day from private equity firms. And that was for 365 days a year.
Then came 2008. First it was Bear Stearns and then Lehman Brothers collapsed and we all thought the apocalypse had arrived. By the time the first half of 2009 rolled around we were lucky to receive two tombstones a week. The recession was declared over in 2009 and in the fourth quarter there was a modest uptick in activity.
Enter 2010 and things continued to improve modestly until the fourth quarter when activity spiked sharply upward. The rush was on to avoid the expected expiration of the Bush tax cuts. Tombstones were probably coming in at the rate of one a day at the end of the quarter and continued on into January.
Well, we’ve finally made it to 2011 and guess what. You’re right, the volume of tombstones has fallen appreciably since January to three or four per week.
The following table demonstrates the roller coaster ride the private equity industry has been on the past five years. The statistics are from the latest PitchBook report. As we all know the zenith for the industry was reached in 2007.
Annualizing the first six months of 2011 suggests that there will be slightly over 1,600 transactions completed in 2011. That is probably overly optimistic given the just announced GDP growth numbers for the second quarter which was a very anemic 1.3%. More worrisome was the massive downward revision of the first quarter from 1.9% to .4%.
Even before the release of the latest GDP numbers, the casual observer realized the economic recovery was by no means robust nor is it likely to be for the foreseeable future. The economic growth leading up to the financial crisis was driven by an unsustainable availability of cheap credit. It will take years before the resulting excesses have been wrung out and for private equity to realize their investments in portfolio companies.
P.S.: The Triago Quarterly report for June 2011 is also worth reading for additional insights.