Journal of Corporate Renewal - January/February 2013

Figure 1

distressed transactions for 2012, a 63 percent decrease over 2007.

Private Equity Investments

$1,000

3,500

In addition, no distressed transactions over the past two years were $750 million or greater. Since the financial downturn started in 2008, one of the major features of distressed investing has been the lack of large transactions. It appears that transactions in excess of $750 million will not be closed with nearly the same regularity as they have been in the past. It also appears that a similar pattern has held for transactions in the $250 million to $500 million range as well. Through Q3 of 2012, transactions in that range have accounted for slightly less that 2 percent of deal flow, down from 6 percent in 2011.

Capital Invested ($ in billions)

3,084

3,000

$800

2,286

2,042

$600

1,943

1,140

$400

1,214

2,500

2,000

1,500

1,000

Number of Deals Closed

$200

500

$0

2007 $826

2008 $359

2009 $150

2010 $337

2011 $354

With the continued decline in larger transactions, those of less than $50 million now represent about two-thirds of deal flow, up about five points from 2011. Smaller deals have also increased as a proportion of capital invested in distressed transactions. They increased from 10 percent in 2011 to more than 20 percent in 2012. However, the central focus of distressed transactions continues to be the lower middle market, defined as deals of $10 million to $50 million. This segment in 2012 represented more than one-fourth of all distressed transactions through Q3.

Capital Invested ($ in billions)

Number of Deals Closed
YTD Q3

these funds, the portfolio company overhang could present a serious problem for them. Fund managers do not want to be left without an exit.

even if sponsors expect EBITDA multiples to increase in the future.

PE funds, distressed or otherwise, also
need to ask themselves, “What is my
best strategy to exit?” With an estimated
4,000 or more companies currently in
their portfolios, some in the PE industry
have taken to calling the situation the
“portfolio company overhang.” While
the $400 billion PE capital overhang has
received much hopeful attention from
Many have an eye on undeployed capital,
but it makes little sense for managers
to load up on more investments when
they can’t exit those they currently have.

Uncertainty about future tax rates
and the tax treatment of carried
interest should encourage managers
to seek alternative exits by the
end of 2012 instead of waiting for
economic conditions to improve,
Companies that are good candidates
for traditional M&A are characterized
by a steady return of growth and
profitability, stability in margins, a
good and defendable market position,
a diverse customer base, and good
credit quality. So where do these criteria