Leveraged buyouts (LBO) have been noticeably absent so far in 2014 despite a thriving mergers and acquisitions (M&A) environment, according to a Goldman Sachs research report.
The phenomenon is puzzling, the firm’s analysts said, given extraordinarily high dry powder—over $450 billion—and historically low rates. However, the roaring stock market and expensive valuations could have prevented private equity firms from taking a public company private.
According to the report, only 20% of total US M&A activity year-to-date has been from financial sponsors—or private equity firms. The figure was the lowest since 2002—outside the financial crisis—and less than the four-year average of 27%.
In addition, there was an absence of large LBOs so far in 2014, Goldman Sachs found. Its data revealed only $3 billion in deals year-to-date, significantly less than the annual average of $75 billion over the past decade.
However, there could be an upswing in private equity deals in the near future, the researchers said.
The current record levels of buyout dry powder could mean up to $1.3 trillion of deployable assets for future deals, the report found. Some financial sponsors may also seek to “get ahead of rate hikes” while loan spreads remain low.
More private equity firms could seek LBO opportunities outside of the US, Goldman Sachs said, especially in Europe and Asia. “While the US still represents the lion’s share of the financial sponsor-related transaction volumes, it has been a relative underperformer vs. prior cycle averages.”
According to private equity firms KKR and Blackstone, more than 50% of their investments over the last year had been abroad.
Future LBO activity may also deviate from the traditional public-to-private transactions, the report said. More complicated structures are likely to emerge, the analysts argued, including private equity firms partnering with non-private equity firms.
Despite these factors, private equity firms still face stiff competition, especially from strategic buyers that are looking to incorporate companies into their own, the report said.
“One of the challenges for the large sponsors is competing in some of these large strategic deals and I think it’s a little bit harder than it probably was in the last cycle of putting money to work,” Kenneth Jacobs, chairman and CEO of Lazard, said during an earnings call.
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