Beginning in the first quarter of 2020, the world was faced with an unprecedented challenge as COVID-19 ravaged the globe and international economic activity dropped to historically low levels.
Private equity was no exception. As the world hit pause and locked down to slow the pandemic, private equity dealmakers were left scrambling to adjust to new realities. It should surprise no one that private equity deal making took a nosedive in the first and second quarters of 2020.
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The illustration above shows the most active U.S. states for deal making (California, New York, and Texas) went from a peak of 130+ deals per state in Q4 of 2019 to no state surpassing 90 deals in Q2 of 2020.
The dropoff in economic activity had an effect that many did not realize at the time: because they couldn’t spend their money, individuals and institutions were forced to become savers. For PE firms, this meant dry powder allocated to deals in Q1 and Q2 piled up to be deployed in Q3 and Q4, when deal-making began to ramp up with a focus on add-on acquisitions for platforms.
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Relatively speaking, most deals appeared to proceed in those states with more lax restrictions surrounding COVID-19. Focusing on California, the add-on deals in the state dropped from 98 in Q4 2019 to 57 in Q2 2020, a drop of 42%. In contrast to California, the state of Georgia only saw a 33% drop, with add-ons falling from 18 to 12 during the same time.