This article originally appeared in 2018 Annual Private Equity in Review, published by PitchBook and ACG New York. It is reprinted here with permission.
Deal activity in the domestic M&A market was extremely robust, with initial reports of the total value of deals consummated in the United States exceeding all recent years other than 2015. Despite the boon of dealmaking last year, market volatility in December 2018 caused concern among deal professionals that activity would slow. A closer look at deal activity in 2018 showed a record-breaking level of transactions only through three quarters, with the momentum stalling in the fourth quarter. This slowdown came as a result of several factors, including increased worries around the political climate, punitive trade policies, the government shutdown and the state of global economic growth as a whole. While these concerns somewhat remain in place, the strong start in deal activity in 2019 leads the deal community to expect another fast-paced and successful year for M&A.
The start of the new year sees a continued high level of corporate liquidity that had been sitting on the sidelines, being allocated to strategic growth. The increase in reserves come as a result of recent record-setting profits and the benefits from the 2017 changes in the federal tax law and is in addition to what is believed to be over $1 trillion in available capital held by PE funds. All of this dry powder, combining with what is currently a low-growth environment, predictions of a slowing economy and the requisite potential for stability in company valuations, will likely result in more cash being put in to use in 2019. The PE arena, in particular, has the potential to be in for an extremely active year.
While some of the factors that contributed to the slow finish in 2018 are certainly still in play, the political climate is somewhat more deal-friendly. While the Democrats have gained control of the House of Representatives for the next two years, continuing political battles portend legislative paralysis to alter the current regulatory environment, or to enact any swift and sweeping legislative changes. The decrease in volatility that comes with this should allow investors to feel like they are on sturdier ground, and should increase institutional confidence as a whole. However, some caution is warranted when it comes to predicting cross-border activity and investment as result of trade tensions and resulting tariffs with China and other countries, trade sanctions, uncertainty around Brexit, and the slowdown of the economy in the European Union, as well as the expanded scope and focus of CFIUS.
Perhaps most importantly, the sputter at the end of 2018 does not seem to have dulled confidence within the dealmaking community. According to a recent Deloitte poll of 1,000 industry players, 76 percent believe that their companies are in a position to close more deals this year than they did in 2018. That number moves even higher when limited to only PE professionals, with 87 percent of those respondents expecting to see increased deal activity in the coming year.
This year is set to be a solid rebound from last year’s slow fourth quarter and a return to the active deal environment of early 2018. While PE is expected to the lead the way, corporate dealmaking activity and no shortage of capital or confidence is expected to make 2019 another very busy year for dealmakers.
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