Study: Deal volume and valuations plummet

An increase in US deal flow is dependent on the credit markets even as private equity firms are bullish on valuations, according to Ernst & Young.

A sharp drop-off in transaction volume and plummeting valuations will present attractive opportunities for private equity firms once stalled credit markets open up in the US, according to a recent report from Ernst & Young.

US deal volume has dropped off roughly 30 percent in the first three quarters of 2008 as compared to the same period last year. A further decrease has been seen in the first two months of 2008 with October’s 172 announced deals and November’s 100 announced deals being significantly less than the 254-per-month average in the first three quarters.

The lack of deal flow has led to the lowest corporate valuations in many years creating significant opportunities for cash-rich private equity firms to buy assets at a bargain, according to the report.

Many private equity firms have significant capital on hand due to strong fundraising in 2008. Private equity raised $656 billion in the first three quarters of 2008, representing a 36 percent increase from the same period last year.

“Everybody is bullish from a valuation perspective that there are going to be some good opportunities in the next year or two,” said Gregg Slager, director of private equity for Ernst & Young transaction advisory services.

Although valuations have dropped, firms at present are primarily focused on preserving their portfolios and value creation, Slager added.

“It is completely contingent upon the credit markets to see the transaction market return,” Slager said. “It’s up to the banks to start lending money again.”