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Bailey McCann, Opalesque New York:

The pandemic is finally coming for private equity. New data from Capstone Headwaters shows that mid-market deal activity dropped by 21.6% in the second quarter. Overall deal volume in the mid-market has dropped 50% since the start of the year. Debt financing is also down, falling to 3.3x EBITDA representing a significant decline from 4.0x in Q2 2019.

According to the report, buyers are still focused internally as they scramble to adjust to work from home and try to manage remote due diligence. Lenders also pulled back, taking a fresh look at underwriting and covenants to minimize any potential losses. Middle market leveraged lending data suggests a significant erosion in credit quality as the pandemic wears on. Defaults are also on the rise. Overall, the default rate of U.S. leveraged loans increased to 3.7% at the end of June, almost double the rate at the end of March (2.0%), the report notes. As the pandemic persists and stimulus efforts abate, fund managers expect default rates to tick higher and reach 5.3% by the end of 2020.

In this environment, private equity sponsors have pivoted to add-ons - smaller deals that enhance a platform investment. 71.4% of LBOs in the second quarter were add-on transactions. Private equity sponsors have approximately $1.2 trillion to put to work over the next few years, so GPs will have to look for deals wherever they can find them. For founders ready to sell, data in the report suggests that t......................

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