As the calendar turns to 2011 and the broad-based economic recovery transitions from nascent to full-bore, we think that a return to '05–'07 levels of M&A activity is not out of the question (whether leverage levels will once again approach their historical zenith is uncertain but, with investors showing increasing appetite for risk and the availability of high-yield debt, we're not betting against it). What we know (and what we are known for) is private equity M&A so, against a backdrop of increased M&A activity, here are three trends to watch for in 2011:
Healthcare will continue to sizzle
According to PitchBook data, in the past two years private equity firms exited 81 companies and made 187 new investments in the healthcare industry. Given the Street's overwhelmingly positive reaction to Community Health Systems' $7.3 billion bid for fellow hospital operator Tenet Healthcare, Cerberus' acquisition of Caritas Christi Health Care, and HCA's plans to go public in 2011 (after returning an estimated $4.25 billion (!) in dividends to owners KKR and Bain Capital in 2010), expect continued consolidation in the hospital industry and for private equity investors to continue chasing returns in the healthcare space, particularly in the medical device and services sectors.
Large, strategic acquirers will continue to spend (materially) more on M&A than R&D
Don't get us wrong: companies like Dell, Google, HP and Thermo Fisher Scientific will continue to spend on R&D. But (as has always been the case?) real innovation is happening at smaller, more agile companies, and we expect that those companies will continue to be gobbled up at breakneck speed in 2011. For proof of the insatiable appetite for "hot" young companies, look no further than the bidding war for 3Par that erupted between rivals HP and Dell in late summer 2010 and the media frenzy that broke out when it was leaked that Google had Groupon in its sights. This is great news for PE portfolio companies (as well as for family or founder-owned businesses) as 2011 should continue to present good opportunities to realize existing investments at attractive multiples.
"Flight to quality" will result in increased secondary transactions
Due to decreased leverage levels and increased equity checks (in each case, relative to the historic highs of the mid 2000s), expect private equity investors to prefer more "mature" (and, as a result, perceived to be less risky) companies that have already benefitted from having professional investors. And with fundraising on the horizon for many PE firms, returning capital to investors will continue to be top of mind. As a result, we expect to see more so-called "secondary" transactions, where a privately-held company is sold by one private equity firm to another.
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