Executives at private equity firms quietly fret that the period of bargain-basement prices that usually comes along with an economic recovery has been dramatically shortened, Mr. Greenberg said. Competition for deals by private equity fund executives pressured to invest capital is bumping up prices, as are corporations with lots of cash on their balance sheets to spend.
“Whenever there is competition in the market, it affects price. When there are two people competing, the guy with the lowest regard for his capital usually wins,” Mr. Crandall said. “
At the same time, private equity managers need to sell companies that they have been holding longer than anticipated.
“That dynamic is what is driving some of the recent deal activity,” said Andrew McCune, partner in the Chicago law office of McDermott Will & Emery LLP. “A number of funds in the market are coming under pressure to put money to work because of the slow pace of deals during the economic downturn.”
“Investment bankers tell us that there is a pipeline of opportunities to bring to the market,” Mr. McCune said.
Added Laurence Bronska, another partner in McDermott Will's Chicago office: “We see sell-side activity, in part, because they have been holding investments for longer than the projected period of time, and where the investments performed well during the economic downturn, they see 2010 as an opportunity to harvest opportunities and return capital to investors.”
Mr. Bronska said the law firm saw a surge of transaction activity in September and October, and he expects it to remain high for the rest of the year.
One of the drivers of some of this activity has been possible tax increases, especially capital gains, he said. This has pushed some company owners and private equity firms to complete transactions before the end of the year.
Indeed, most of the deals executives at Graham Partners Inc. expect to close by the end of this year are driven by tax considerations, said Christina W. Morin, managing principal at the Philadelphia-based private equity firm.
“We raised a $515 million fund in 2008,” Ms. Morin said. “Between mid-2008 and mid-2010, we closed two platform deals (for that fund). I expect that we will close four deals between September and December 2010. It's a dramatic pickup. For us on the lower end of the market, three of the four were driven by the sellers seeking to take advantage of the tax changes, specifically, possible changes in the capital gains rate ... It may not be a big issue now, but it was a factor during the time frame.”
At the same time, leverage has been increasing rapidly in the past five months, said Dominique Senequier, CEO of AXA Private Equity, Paris.
“We're beginning to see a very little "covenant lite' deals,” she said. “Some of the same conditions we saw in 2006 are coming back. Not only "covenant lite', but we are seeing high yield and higher levels of leverage.” (“Covenant lite” refers to loans with easier terms that were popular in 2006 as banks competed to get business from private equity firms.)
“Valuations are high. I think you have to pick your spots and believe in the management teams,” said Art Rozelle, partner at Charlotte N.C.-based middle-market private equity firm, Pamlico Capital Partners.