Strategic Market Insights

M&A Market Executive Summary

• The M&A market had another strong year in 2019. The 2020 outlook for M&A activity remains positive due to slowing opportunities for pure organic growth, relatively strong corporate balance sheets, and strong private equity demand for investment opportunities in quality private businesses.
• While the late-stage nature of the economic cycle is top-of-mind for investors, expect marquee assets with resilient business models to continue to command premium prices in competitive processes.
• A surplus of capital in the forms of corporate cash reserves and private equity dry powder combined with reasonably aggressive debt providers will continue to support M&A activity levels and valuations. As shown in Figure 1, S&P 500 aggregate cash positions (excluding financial companies) have hovered near $1.5 trillion over the past few years.

Figure 1: S&P 500 Aggregate Corporate Cash Balances Continue to Grow^[1]

Sources: FactSet and Preqin /  View Accessible Version of this chart.

• Global private equity firms have more than $1 trillion to invest over the next several years, and healthy annual fundraising levels and limited partner interest continue to increase this amount.^[2]
• Average purchase price multiples continue to be robust, with high-quality assets receiving significant buyer attention (Figure 2).

Figure 2: Average Purchase Price Multiples Remain Strong

Source: Standard & Poor’s   /   View Accessible Version of this chart.

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IPO & Follow-On Executive Summary

• Economic slowdown fears weighed on early October sentiment and drove choppiness, but Trade Deal optimism boosted equities in mid-October ahead of a “Phase One” agreement ultimately enacted in December.
• Closing the year, the Dow finished up over 6.0%, S&P up over 8.5% and the NASDAQ up over 12.1% in 4Q. Tech, Healthcare & Financials were the big gainers, as well as Communications, Materials, Industrials, Energy and Consumer Discretionary / Staples. REITs & Utilities were the only sectors to trade lower during 4Q.
• During the quarter, 20 IPOs raised $4.8 billion in proceeds, slightly down from a slow 4Q last year in both proceeds and issuance. Healthcare deals continued to make up a large portion of the IPOs issued, making up 51% of deals by units and ~21% by proceeds. Of the 20 IPOs during 4Q, 12 priced within the range, 2 priced above the range and 6 priced below the range. On average, companies traded up 22.8% on the first day of trading.
  • 4Q 2019 IPO issuance was somewhat muted due to high profile unicorn IPO execution difficulties, which led to issuers, including many of Solebury’s clients, electing to focus their targeted pricing dates on the first half of 2020 given 4Q IPO market volatility. 
• In 4Q 2019 there were 72 marketed follow-ons resulting in $17.4 billion in proceeds, which was significantly more than the 44 marketed follow-ons in 4Q 2018 that raised $12.5 billion in proceeds. On average, offerings traded down -8.8% from filing and had an all-in discount of -13.2%. Aftermarket performance was positive, with companies trading up 8.9% on average in the week following an offering.
• In 4Q 2019 there were 29 block trades for $13.7 billion in proceeds, which was slightly more than the 25 block trades in 4Q 2018 that raised just $9.1 billion in proceeds. On average, deals were bid at a discount to last trade of 4.0% and traded up 0.7% in the week following an offering.

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Debt Capital Markets Executive Summary

• For cash flow middle market companies, 2019 overall was a great year to borrow due to lack of quality opportunities for investors, and 2020 is shaping up in a similar fashion. Bank and institutional investors continue to have significant lending capacity for the right credits, providing many borrowers open access to the capital markets with competitive pricing.
• The asset-based loan market also continues to be an attractive source of capital as pricing, structural flexibility and investor appetite remain at robust levels. Throughout 2019, the slowdown in asset-based M&A issuance has heightened the supply/demand imbalance, which increased competition in the market for transactions. Undrawn spreads remain stable, while drawn spreads directionally tightened throughout the year.
• In the pro rata leveraged loan market, bank investors continue to seek double B-rated bank loans, providing consistent demand for borrowers pursuing M&A and other capital allocation priorities.
• The broadly syndicated institutional loan market finished 2019 with higher loan repayments and less new-issue volume, which caused loan spreads for double B and many single B borrowers to tighten versus earlier in the year. At the same time, institutional investors are pruning the riskiest parts of their portfolios, evidenced by certain B3 and CCC spreads generally widening. Second liens are transitioning from placement in the syndicated market to being placed privately, giving private equity sponsors and borrowers certainty on execution.

TLB Flex Activity

Source: S&P Capital IQ LCD   /   View Accessible Version of this chart.

• A “risk-on” mindset saw high yield bond volume up meaningfully in 2019 and up significantly in the fourth quarter versus both the prior quarter and year over year, with spreads tightening from ~T+400 bps to ~T+360 bps throughout the fourth quarter.
• Banks continue to seek out investment grade loans, but new-issue opportunities remain limited, with IG M&A lending shrinking 20% in 2019.  In fact, the fourth quarter showed a miniscule ~5.6% of IG loan volume as “new money” versus refinance volume, the lowest print Refinitiv LPC records going back to 2003.  As a result, the lack of new-issue opportunities coupled with continued bank appetite kept spreads steady and the IG loan market wide open.^[3]

Investment Grade New Money Loan Volume

Source: Refinitiv LPC   /   View Accessible Version of this chart.

• Investment grade bond issuance beat estimates at $1.13 trillion, though down 3.7% from 2018’s tally. Investment grade fund flows were strong in 2019, a trend that is expected to continue through 2020, as investors’ search for yield and duration is likely to remain a driver of demand.

Source: Lipper   /   View Accessible Version of this chart.

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