In the waning days of summer, it is tempting for some to think mergers and acquisitions have melted away with the heat.
Despite a strong showing in July, with a strategic-driven $179.1 billion of announced transactions, overall deal volume is down close to 30% from the year-earlier period, according to research firm Dealogic. And private equity buyout volume is off nearly 74%. The private equity firms that drove the M&A boom in 2006 and the first half of 2007 are still adjusting to radical changes in the credit markets, adding to the seeming dearth.
Given all this, it's very easy to justify the doom and gloom of dealmakers who see that private equity no longer rules the roost.
I would argue, however, that commiserating over a meager market, is, for all intents and purposes, missing the point. Those pining for the heyday, the leverage-fueled boom of 2006-2007, are going to miss the underlying signs of an emerging new direction for M&A. The leverage-fueled boom isn't coming back, but better deals -- ones that look very different -- certainly are.
And it's private equity, which some have relegated to the sidelines during the credit crunch, that is going to lead the way.
Reports of the death of private equity have been greatly exaggerated. Look at the inflow of capital. Multibillion take-privates may be over, but buyout shops are still raising enormous amounts of equity. So far in 2008, buyout funds have raised more than $100 billion, which comes after several consecutive years of record-breaking fundraising. In fact, two of the biggest fundraising quarters ever immediately followed the bursting of the private equity bubble last summer. Compare this with a major decrease in financial sponsor acquisitions, and it becomes evident that there is a lot of dry powder and a lot of private equity managers hunting for places to deploy capital.
So where is all the money going?
I think it's going to go where North America has enormous capital needs -- sectors like infrastructure and alternative energy that require huge amounts of equity. Instead of old model, turbo-leverage deals, private equity will infuse capital, on a much more modestly leveraged basis, into these relatively untested growth markets.
If you want a harbinger of what's to come, take a look at a $1 billion joint venture announced this spring between a traditional power-plant operator, AES Corp., and Riverstone Holdings LLC. They each made $500 million bets on solar energy, almost as a venture capital deal. While a relatively small deal, it was a manifestation of the energy needs we're facing and the way private equity can play a leading role.
If private equity is going to start funding these initiatives, it's going to have to get its hands dirty. There will be more risk and possibly lower returns. You'll see a deleveraging of deals across the board. In sectors like infrastructure you have to know the business backward and forward to know if your equity is at risk. So you need to find guys who know the business backward and forward, not just hotshot M.B.A.s. But with their oceans of capital, why shouldn't private equity firms build the new Tappan Zee Bridge before the existing one crumbles into the Hudson River? Or work with big energy companies to greenfield ethanol plants? I think that they may well do things very much like that.
In part because of this new role for private equity and in part because of the continued strength of strategics driving dealmaking, Jones Day expects activity by volume of deal transactions to outpace expectations. We have so much in the pipeline right now that we expect the back half of 2008 to be more active than the first half of last year.
We're not waiting for the easy money, 25% equity, gigantic fee, wedding cake leveraged buyout model to come back; instead, we're sure the equity era is under way. Those that recognize the signs that point to the new paradigm in the deal markets will have first-mover advantage.
Robert A. Profusek is global head of M&A at Jones Day in New York.
