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Pandemic, economic uncertainty slow US private equity deal activity in Q1

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Pandemic, economic uncertainty slow US private equity deal activity in Q1

Private equity deal activity in the U.S. got off to a slow start in the first quarter of 2020, though fundraising in the period outpaced year-ago amounts.

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Entry deal volume was down 21.68% year over year to 1,174 transactions announced in the first quarter, according to S&P Global Market Intelligence data. Gross transaction value for private equity entries during the first quarter was $45.85 billion, down from $50.06 billion across 1,499 deals announced in the same period in 2019. Quarter over quarter, entry deal volume dropped 4.63% from 1,231 deals, but gross transaction value was up 8.03% from $42.44 billion in the fourth quarter of 2019.

Add-ons nudged slightly higher to 844 deals from 834 transactions year over year, but were down from 887 deals in the fourth quarter of 2019.

While there is plenty of dry powder, competition for deals, high valuations and an expected economic downturn have hindered dealmaking activity.

The uncertainty stemming from the coronavirus pandemic has also led private equity firms to shift their focus away from M&A activity to supporting their portfolio companies. The impact of pandemic-related lockdowns in the U.S., however, is likely to be felt more in the second quarter.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

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The IT sector continued to be the most attractive market to U.S. private equity investors, with 440 transactions valued at an aggregate $15.81 billion signed in the first quarter. Healthcare was the second most active market for entries, with 212 deals announced, followed by the industrial and communication service sectors, with 134 and 121 deals, respectively. The communication service sector took the second spot by gross transaction value, at $12.25 billion, surpassing the healthcare and industrial segments, at $5.47 billion and $5.43 billion, respectively.

Large private equity deals in the IT space announced in the first quarter include Advent International Corp.'s planned buyout of Forescout Technologies Inc. for $1.9 billion and Hellman & Friedman LLC's pending takeover of Checkmarx Ltd. from Insight Venture Management LLC, also known as Insight Partners, for $1.15 billion. Insight Partners announced and finalized its acquisitions of Veeam Software Group GmbH and Armis Inc. for roughly $5 billion and $1.1 billion, respectively, during the first quarter.

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Fundraising

Capital raising continued at a brisk pace in the first quarter, according to private equity data provider Preqin. Funds targeting North America raised $101.1 billion across 152 funds in the first quarter, compared to $63.3 billion raised by 133 funds in the 2019 period.

Lexington Partners LP and Platinum Equity LLC closed the largest U.S. funds in the first quarter, according to Preqin data. Lexington Partners' secondaries fund, Lexington Capital Partners IX LP, closed at $14.00 billion, while Platinum Equity's buyout fund, Platinum Equity Capital Partners V, pulled in $10.00 billion.

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Several U.S.-based private equity firms launched funds during the first quarter. Thoma Bravo LLC's technology buyout vehicle, Thoma Bravo Fund XIV has the largest target, at $14 billion, followed by KKR & Co. Inc.'s Asia-focused buyout fund, KKR Asian Fund IV, which is targeting $12.50 billion.

Some 2019-vintage funds, including Carlyle Group Inc.'s Carlyle Global Partners II LP and the SoftBank Innovation Fund, have held first closes and are continuing to raise capital.

Already wrestling with the challenge of raising capital from limited partners, private equity managers are expected to keep their funds in the market even longer in the wake of the pandemic.

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