Q3 2020 Middle Market Private Equity Update

GCG’s Q3 2020 Middle Market Private Equity Update provides an overview of latest trends in the private equity market.

Key findings include the following:

- The number of middle market private equity deals increased by 58 percent during the 3^rd quarter of 2020 from the low point in the 2^nd While this is a positive sign, the 3^rd quarter was still 36 percent lower than the 3^rd quarter of 2019. It was also the lowest level of quarterly deals since 2013, with the exception of the 2^nd quarter of 2020. While activity strengthened, there are a lot of headwinds in the M&A market right now. A reduction in the supply of deals, the difficulty in traveling to meetings or company visits, and the uncertainty in the economy, all make this a challenging time for M&A. We expect this trend to continue into 2021.

- Capital overhang, which represents the amount of capital raised by PE funds and yet been invested, stands at its largest level it has ever been globally. The majority of this capital is in funds that are 0-2 years old and based in the U.S. The $1.2T of overhang at the end of 2019 has between 5-7 years to be invested based on average fund mandates that capital needs to be deployed within seven years. This means that in combination with the current market volatility, the overhang has potential to keep growing. This is good for MM companies as it encourages competition for deals among PE firms.

- Private Equity deal value in Q3 2020 was the lowest since Q3 2016 (not including Q2) and represented a drop of 27% and 33% from Q3 2018 and Q3 2019, respectively. Q3, however, represented a major jump of 76% from Q2 2020 as trillions of dollars were pumped into the market and investors sought opportunities to deploy cash. The distribution of dollars invested by deal size in Q3 was consistent with past quarters, which suggests the drop-off and subsequent jump in PE M&A effected deals of all sizes equally.

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