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
continued on page 8
Figure 2
Distressed M&A Volume
$100
500
399
Deal Value ($ in billions)
$80
$60
$40
$20
323
332
272
197
187
163
125
139
109
76
400
300
200
Number of Deals
100
47
51
Jan/Feb
2013
$0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
2011 Y TD 2011 Y TD 2012
Journal of
Corporate
Renewal
6
Undisclosed
Middle Market
> $750 M
Deal Value ($ in billions)
Data Source: Dealogic