Was 2011 the rebound year for private equity many hoped for?

As we head into 2012 with concerns lingering over the health of both the domestic and global economies, the boom years of the private equity markets from 2003-2007 seems like a distant memory. But 2011 was meant to be a rebound year. Has it been?

During the boom years, private equity activity accounted for $745 billion in transaction value and nearly 25% of all U.S. activity. But in 2008, due to a tightening of the credit markets, private equity activity came to a halt. In 2009, private equity activity accounted for only $87 billion in transactions and dropped to 12% of all U.S. activity. Next , 2010 followed suit, but as markets stabilized during the course of that year, signs pointed to a rebound in 2011.

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The year certainly started off that way. During the first quarter, activity resembled that of the boom years. January topped the year in volume, with 120 transactions, and while the figure dropped for the months in the rest of the quarter, deal values reached $14 billion in February. The top deals for the quarter included Blackstone Group LP’s acquisition of Centro Properties Group for $9.4 billion, Clayton Dubilier & Rice LLC’s acquisition of Emergency Medical Services Corp for $2.8 billion, and Thomas H. Lee Advisors LLC’s deal to acquire Acosta Inc from AEA Holdings LLC for $2 billion.

During the second quarter, activity remained optimistic, as signs of strength continued. May represented the highest volume in activity, reaching 99 announced transactions, while the month also topped out at $9.7 billion in transactions. For the quarter, the acquisition by Bain Capital LLC and Hellman & Friedman LLC of Securitas Direct AB from EQT Partners for $3.5 billion led all deals, followed by Clayton Dubilier & Rice LLC joining AXA Investment Managers Private Equity Europe SA, Caisse de Depot et Placement du Quebec acquiring SPIE SA from PAI Partners SAS for $3 billion, and Leonard Green & Partners LP joining with CVC Capital Partners Ltd in its acquisition of BJ’s Wholesale Club Inc for $2.5 billion.

Through the first half of 2011, activity for both volume and value exceeded 2010 totals, with 533 announced transactions and $53.9 billion in transactions for 2011 compared to 339 transactions and $29.4 billion in transactions for the year prior. The rebound stemmed from the considerable amounts of cash held by private equity participants who were waiting to be deployed, as firms looked to make additional bolt-on acquisitions to their earlier investments. In addition, private equity firms had a growing number of portfolio companies held in funds that were nearing the end of their fund life. As these firms looked to capitalize on their investments and exit these investments, deals were made with strategic buyers as well as secondary buy-outs. Lastly, firms also were able to look to the recovery in the stock markets as a way to exit investments through IPOs. With the stabilization of the financial markets, private equity activity had signaled its return, leading to a recovery in the overall M&A environment.

What lay in the months ahead, however, changed the momentum gained from earlier in the year and ultimately changed the outlook in the M&A markets. Questions about the global debt crisis arose, and concerns surfaced domestically over whether the U.S. could default on its debt. These concerns also affected the markets across the Atlantic, impacting several European countries.

With the use of debt to finance transactions for private equity firms, the positive outlook from the beginning of the year now was deemed hopeful at best, and the summer months brought forth a slowdown in the overall M&A market and private equity marketplace. Through the third quarter, deal activity dipped to 257 transactions., More indicative of the markets, value totals dropped to its lowest figures of the year to $4.2 billion in September. Through the quarter, the biggest transactions included Apax Partners LLP joining with the Canada Pension Plan Investment Board and The Public Sector Pension Investment Board to acquire Kinetic Concepts for $5 billion, KKR & Co LP joining with Silver Lake Group LLC and Technology Crossover Ventures LLP to acquire The Go Daddy Group for $2.3 billion, and Blackstone Group LP’s acquisition of Emdeon Inc for $2.2 billion.

Now in the fourth quarter, while private equity firms are still putting their capital to work, activity has faced its worst decline. Transactions announced in November bottomed out for the year, at just 66. Through the first two months of the fourth quarter, activity has reached 154 transactions, its second lowest two month output for the year. Notable transactions include the $7.2 billion acquisition of Samson Investment Co in a club deal featuring a private equity and strategic buyer mix of KKR & Co LP, Itochu Corp, Natural Gas Partners LLC, and Crestview LLC; Hellman & Friendman partnering with The Carlyle Group LLC in its acquisition of Pharmaceutical Product Development Inc for $3.7 billion; and an investment consortiums deal to acquire EMI Music Publishing from EMI Group Ltd for $2.2 billion.

While 2011 nears its close, attention will turn to 2012, with the hopes that the slowed finish for this year doesn’t trickle over to start the next. For M&A to rebound as was expected in 2011, private equity activity will need to be a catalyst, but the health of the global debt markets, the volatility of the stock market, and the continuance to deploy the capital raised by private equity firms will also factor. More importantly, a return of confidence in the financial markets is needed for the private equity markets to fuel a sustained rebound in M&A activity.

What Wall Street awaits to fully announce a return is the announcement of a Mega Deal, a headline grabbing multi-billion dollar transaction that signifies the strength of the deal making environment. So while 2011 wasn’t quite the rebound year many hoped for, we will carry our optimism of a healthy M&A market from 2011 into 2012.