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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.

“It is still an attractive market, with investors paying premium valuations for high-quality assets,” says Andrew Dickow, managing director at Greenwich Capital Group. “Strategic companies will continue to use M&A as a means to transform their business in ways they can’t organically, and financial buyers will continue to be active with specific mandates to deploy capital within constrained timeframes.”

We spoke with Dickow, Michigan Capital Advisors’ Gerry Giudici and Renaissance Venture Capital Fund’s Christopher L. Rizik 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?

Rizik: I expect that 2020 will be a year in which dealmaking makes a relatively sharp turn back toward fundamentals. There is no question that many investors have contorted their models in order to validate deals of higher risk or higher valuations, and I expect that we will see them looking more skeptically at deals that simply don’t meet their historic metrics.

Giudici: In light vehicles, look for supplier stress due to launch demands on time and capital. High-growth technologies command outsized multiples (8-10-plus times EBITDA) in electrification, autonomous vehicle technology, cockpit electronics, connectivity, ride share, lightweighting, etc. An original equipment focus away from internal combustion engine technology could make suppliers with technology in turbos, emission control and other internal combustion engine technologies attractive in 2020 and beyond.

Dickow: The outlook going into 2020 is very similar to how investors and companies felt going into 2019. In 2019, overall optimism about the broader economy had diminished, as there was general concern about overall economic conditions and a sentiment that we were in the final stages of the economic cycle. Some of the key concerns then regarding the U.S. economy, such as the upcoming elections and a potential trade war, are still present today. However, both strategic and financial buyers are still sitting on cash hoards from the recent tax cuts. With interest rates and unemployment remaining at relatively low levels, I expect deal activity in 2020 to be strong through Q2, if not through Q3, up until the election. 

What are some potential issues that could alter your expectations one way or the other?

Rizik: The biggest issue is that there is still so much money out there chasing deals, from both traditional and nontraditional sources. A question is whether dealmakers will have the patience to sit out opportunities with which they are uncomfortable, or whether the momentum of dealmaking will push them forward into higher investment risk situations.

Giudici: Ease of labor availability and trade tensions could help mitigate supplier launch stress.

Dickow: There are a few potential macroeconomic triggers that could push the U.S. economy toward a recession sooner than expected, which would have a direct impact on M&A activity immediately. The most prevalent will be the trade war between the U.S. and China. Investors should not only be concerned about potential tariffs and negotiations dragging on, but they should also be monitoring how business leaders across all industries are spending and whether or not they are holding back on major investments due to the uncertainty. As long as consumer spending remains consistent, and there are no significant cost reductions across the business environment, 2020 should continue to be another strong year for M&A activity.

What is the climate like for raising capital and financing transactions?

Rizik: It is still quite strong, but there are certainly some warning signs, particularly at the top end of the market.

Giudici: Equity capital and debt capital are available, but plenty of options and alternatives make it more difficult to get attention. Market softening will increase attention on working capital and strong balance sheets. For straight-up-the-middle automotive transactions to maintain multiples in the 4-7x range, targets will have to command sustainable market share, growth potential, global scale potential, a strong book of business and backlog, customer platform diversity, profitability and a level of technical sophistication in manufacturing processes and/or products.

Dickow: The optionality for raising capital has never been as robust as it today. Companies that are looking for working capital to grow their businesses have access to a broad spectrum of capital providers. As alternative sources of financing have become more prevalent in recent years (e.g. mezzanine and unitranche), traditional senior lenders are being forced to be more flexible in order to compete. Companies with a healthy financial profile and strong growth prospects can secure financing that has longer terms, with little to no amortization of the principal over the course of the loan in some scenarios. Alternatively, for companies looking for partial liquidity, there are more options, with hundreds of new private equity firms and the emergence of family offices actively looking to deploy capital.