ACG National Capital member and sponsor, Grant Thornton, recently partnered with PitchBook to author the 2011 Mid-Year Edition of their Private Equity Exits Report. This report, which is available for download free on their Web site, was intended to shed light on private equity exits, which usually receive far less attention than private equity acquisitions. The report looks at private equity exit activity as of mid-2011, specifically as of June 30, 2011.

The results of the research in the report paint an interesting picture of the private equity space that could illustrate the level of M&A activity in store for the National Capital region in the near future.

The private equity lifecycle begins with the raising of funds. Firms then invest funds in a company and hold onto it while taking actions to increase its value. Those companies are then sold and the money is returned to the fund investors.  If successful, the private equity firm may go on to raise another fund and start the cycle again. An interesting finding in the report is the impact that the economy has had on this lifecycle.

During the economic downturn that began in 2008, private equity firms were faced with some significant challenges. The difficult M&A market and decrease in valuations due to the economic downturn made it increasingly difficult for private equity firms looking to sell the existing companies in their portfolio. This led to firms holding onto their portfolio companies for longer than expected, and a significant decrease in exits. On the other hand, the decrease in M&A activity created by the economic downturn also left many private equity firms with money to spend.

So what does this mean for the M&A market today, and what can we expect to see here in the National Capital region?

Well, M&A activity is once again increasing. Private equity firms are looking at their portfolio companies and are starting to see potential for unloading them. There’s three ways for this to occur, via the IPO process, through strategic sales to other companies or via secondary buyouts (i.e. selling the portfolio company to another private equity firm). With the IPO process becoming increasingly difficult to navigate and so many private equity firms coming out of the recession sitting on money to invest, the market could begin to see an up-tick in secondary buyouts.

Things could get particularly interesting in the government contracting market around Washington, D.C. With wars winding down in Afghanistan and Iraq, defense spending is projected to decrease. Consolidation in the market resulted when defense spending was cut in the past. This was a product of large government contractors acquiring smaller companies with the niche technologies and capabilities required to address challenges facing the federal government. A similar rash of strategic sales could result in the near future, with private equity firms looking to sell their portfolio defense and government contracting companies and large contractors looking to add capabilities and technology to compete for smaller defense budgets.

Although M&A activity and private equity exits were down during the economic downturn, they appear to be turning around. It will be interesting to see how the improving economy and other ongoing trends in the market, such as defense spending and the federal budget deficit, impact the frequency of M&A deals and private equity exits in our region. Have an opinion on what’s going to happen in the National Capital region? Download the report and let us know what you think.