M&A activity in 2011 will be fueled by what many in the private equity community call the Double Overhang. The Double Overhang is the result of the $485 billion in private equity capital available to invest and approximately 4,000 portfolio companies that private equity groups will need to sell in the next several years.

Private equity groups raised most of the current $485 billion of dry powder three plus years ago.  That means that unless it is invested soon, private equity firms will lose their ability to call it down from their limited partners when their investment period expires. This overhang has already begun to affect private equity activity; there was a three-fold increase in the number of companies sold by one private equity group to another private equity group (secondary transactions) between 2009 to 2010. It's also interesting to note that private equity firms are feeling pressure to invest more capital in each deal.  In 2010 the median deal size increased significantly.  For example, according to PitchBook, in 2010 the median private equity buyout hit an all-time high of $129 million.

It's also interesting to note that private equity groups are feeling pressure to create liquidity for their limited partners.  Private equity groups will need to exit from the roughly 4,000 companies they currently own over the next several years as their 5-7 year investment periods expire.  This may cause a huge shift in focus for many firms. Up to this point, most private equity groups have concentrated on raising new funds and making new investments. But statistics from PitchBook show that of these 4,000 mature investments, almost half are 5 years or older.  In 2010 there were only 480 exits; so this represents at least a 4-year backlog if exit activity doesn't increase from 2010 levels.

This Double Overhang represents a challenge for private equity groups but presents a unique opportunity for business owners interested in selling and for corporate buyers looking to make strategic acquisitions.  Private equity groups are very motivated to make new acquisitions and at the same time very motivated to sell off their mature investments.

If you would like to undestand what's driving middle market M&A activity and explore your options, please contact the MidCap Advisors office nearest you.