US PE Deal Activity Enjoys Strong Start But Is It Sustainable?

Private equity deal activity in the US was surprisingly – in a positive way – strong in the first quarter of this year. Data from Pitchbook shows that the total value of deals rose for the second consecutive quarter, to $261bn across approximately 2,000 deals. 

One of the trends that Pitchbook called out in the piece was the continued appetite for add-on deals. Almost half of all US PE deals in Q1 were add-ons, the highest since Q2 2020. That’s perhaps not much of a surprise given the need for buyout firms to bolster their existing portcos in the face of declining valuations as the recent difficulties in the public markets have now begun to seep into the private side. 

I’d expect to see add-ons continue to be attractive to buyout firms. It’s certainly something that I hear from some of our clients in the PE world and it makes sense, especially in a challenging environment.  

And it seems it’s only going to get more challenging. The larger firms will now have an added regulatory compliance burden to contend with in the shape of amendments to Form PF, and the smaller and mid-size shops that don’t have a cybersecurity program will soon need to because the SEC is in the process of putting mandatory cyber reporting requirements in place. And a recent speech by SEC Chair Gary Gensler at the MFA Legal & Compliance 2023 Conference referenced the agency’s work in looking at fees, expenses, and performance. 

While this largely affects the middle and back office, it’ll have an impact in terms of costs and resources (both people and technology). Added to that the increased risk of a hard landing and the private equity sector looks set for a challenging remainder of the year. 

But many were saying at the beginning of this year that buyout firms were going to endure a less-than-stellar 2023, and then the Q1 deal data comes out and it’s remarkably robust. It’s difficult to know whether US private equity is an immovable object to the macro economy’s irresistible force. It seems like the industry has an answer to every challenge – the banking crisis in March would have seemed to provide an obvious reason for many deals to hit the skids, but then the final month of the first quarter delivered a higher aggregated deal value than either January or February. 

Whether the headwinds facing the industry prove to be the Gleipnir that binds Fenrir remains to be seen. But it wouldn’t surprise me at all if they don’t. 

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Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.  

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