While private equity fundraising is expected to fall below 2019 totals this year, venture capital to private equity buyouts will continue to proliferate, and there will be continued expansion in growth equity deals, according to PitchBook’s 2020 Private Equity Outlook.
“Most of the large PE firms — including Blackstone, Vista and Leonard Green — raised record-setting sums in 2019 and will be in the capital deployment phase next year,” states the report. “While 2020 PE fundraising is sure to be strong when compared to almost any other year, there are currently few funds in the market targeting more than $10 billion.”
Local dealmakers offer a similar forecast for dealmaking activity in 2020.
“The one trend that we see going into 2020 is that deal volume is going to be down compared to the last four years,” says Matt Roberts, vice president at Copper Run Capital LLC. “But the lower middle market is still active. Call it deals for companies anywhere between $10 million and $500 million in revenue. A lot of these companies are owned by baby boomers who need to exit. When you factor in the $700 billion of private equity money that has been raised that people are trying to put to work, investors still think there is a lot of value there and that they can get healthy returns from those funds.”
We spoke with Roberts, ErieBank’s Wes Gillespie, Carleton McKenna’s Chris McKenna and Folio Photonics’ Steven Santamaria to get their thoughts on what to expect from a dealmaking perspective in 2020.
What are some trends that could shape deal activity in 2020?
Santamaria: I expect to see continued technology industry consolidation, especially related to the cloud. Size really matters in the cloud space, and we are moving toward a future of fewer extraordinarily large players who will dictate tech roadmaps and research through their ability to create winners/losers. Startups will continue to seek acquisition rather than IPOs, as R&D is outsourced by the super large. Data is king, where in the past it was oil and gas and manufacturing. Nothing compares to the rise of the data economy. Whoever owns the most data wins.
McKenna: There will be a premium on speed. The capacity for strategic and financial buyers doing add-ons to move quickly may be an advantage in an election year, which inevitably will have excitement and swings in expectations.
Roberts: What I see, especially when you look at professional services, is that it seems like a lot of the really good deals — the really good companies — have sold. There are a lot of companies out there where I think business owners need to do some kind of transition, and they haven’t necessarily planned for that. So you’re going to see a lot more help and planning around getting companies ready for sale and people trying to convince owners that they should be doing that.
Will there be any shift away from what’s been a seller’s market?
McKenna: We don’t envision any changes in the market favoring sellers. There is too much capital in funds, and too great a desire for add-ons to propel earnings growth for any seller with a quality offering to be disappointed.
Gillespie: Perhaps lower multiples, but deals will get done. Current tax advantages could create additional ESOP opportunities.
Are there are any particular industries you’ll be watching in 2020?
McKenna: Innovation outsourcing. The consumer product segment remains very active — the same dynamics exist for acquiring growth and available capital. However, an additional dynamic exists, with larger companies effectively outsourcing some of their innovation and acquiring companies with a proven product market fit that can then be grown through more developed distribution channels. In these cases, the transaction multiples trend higher.
Santamaria: I am a tech CEO, so I pay extra attention to the technology industry and will be watching consolidation and large companies securing supply chain for strategic advantage — for instance, Amazon launching their own chip.
Gillespie: We are paying attention to highly recession-resistant industries to gain favor.
Roberts: We’ve seen a push into spaces, especially on the private equity side, which people think are recession-resistant. We do a lot in the fire protection space — sprinkler systems, fire extinguishers on the walls. A lot of that is service based, but there is also the installation work. That’s a regulated industry, with work that has to get done to meet building codes. From that dynamic, people see it as recession resistant. The mix of customers might change, but the market opportunity doesn’t go away just because there is a recession. You’re seeing people take a hard look at that and putting a premium on these types of businesses.
What is the climate like for raising capital and financing transactions?
McKenna: There is a robust environment for putting capital to work in supporting control and recapitalization transactions. However, more than in prior cycles, there seems to be some discipline holding on levels of turns provided at the various levels in the capital stack.
Santamaria: Unchanged. Venture is flush with funds but will continue to be conservative in funding all but the unicorns. Venture will continue to seek coastal startups versus noncoastal. There is no real primary lending market for startups.
Gillespie: The opportunity to raise capital should still be good at the right price and reasonable criteria.