The State of PE Deal Flow – Quality over Quantity

Nearly halfway through 2023, the reality of the slowdown has begun to sink in, and M&A folks are attempting to foretell closing volumes for the remainder of the year and beyond. For any given firm, the greatest signal to the number of deals likely to close in the quarters ahead lies within their pipeline data for deals logged over preceding quarters. But with the effect of the downturn varying by sector of focus, predictions for the overall PE market are difficult to capture.

SPS’ proprietary analysis on Median Sponsor Deal Flow does just that, aggregating quarterly average deal flow metrics across our private equity clients’ pipelines.

Median deals originated by Sponsors by calendar year increased from 794 to 845 over 2021-2022, respectively. Despite this bump, median Q1 2023 deal flow for private equity firms was 175, which is the lowest count of deals logged over the past three Q1 periods. At the same time, Private Equity closed deal activity declined in each consecutive quarter over 2022, and dropped significantly by 30% from Q1 2022 to Q1 2023.

While deal flow impacts the outlook for closed deals in the quarters ahead, it’s important to note that this is not be a one-to-one comparison. Instead, pipeline data on number of deals seen may be impacted by factors such as broader processes and better deal-data tracking discipline.

Similarly, PE firms are adopting more targeted outreach strategies, which may result in a lower number of deals logged overall yet greater relevance of these deals to firms’ investment strategy. On a recent PE webinar sponsored by SPS, Harv Barenz, Partner at HGGC, said of the current quality of deals he’s seeing, “There’s been a chasm – it’s either been really high quality because folks are having to bring out a deal…so they’re willing to sell an A+ asset because they know that those multiples have stayed pretty tight. Or, people are in a liquidity crunch and have to do something.” Other panelists echoed the sentiment, by and large seeing a lower count with higher quality deals actually getting done.

How long the current slowdown in deal flow will last, we can’t say. But amid a flight to quality in a hypercompetitive environment, firms that will fare well are the ones being proactive to ensure they don’t miss a single deal in their target market.

Find out how SPS can help you fill the gaps in your market coverage today!

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