The state of capital for M&A, and how it could change in a downturn

The amount and diversity of capital available for business investment may be unprecedented. It’s certainly extraordinary. Corporate cash. Private equity dry powder. Bond issuances. Borrowing capacity, especially at historically low rates in the US and other large economies.

Structural changes in the economy and business behavior have helped drive capital growth. Saving rates remain high a decade after the last recession – well past the point when they might be expected to fall, based on past cycles. The transition of the US economy from manufacturing to services has resulted in less tangible investment. Companies that may be struggling with an “ideas deficit” aren’t confident in what they should pursue next, leaving cash largely untouched.

Private investors also are exerting more influence, shifting the capital mix. Private equity firms accounted for less than 10% of total US deal volume in the 1990s and about 20% of volume 10 years ago, a PwC analysis of Refinitiv data found. In 2018, that share surged to nearly 40%. At the same time, more firms are considering longer holding periods that allow more time to create value and generate higher returns.   

At some point, this abundance of capital likely will decline, influenced by short-term economic uncertainties but also longer-term forces. Some of the “savings glut,” for instance, could dwindle as baby boomers who stashed away cash for decades start to spend more in retirement. Yet plenty of funding still could be available for deals by corporate and private investors in a downturn.

"Using equity as a currency is going to be very challenging. However, there’s just this unprecedented level of liquidity."

Colin Wittmer, PwC US Deals Leader

More corporate cash goes to M&A

S&P 1500 companies held about $2.2 trillion in cash and equivalents in 2018 – about three times the amount in 2000. And that doesn’t count cash that companies have invested in longer-term securities, which aren’t included as cash and equivalents on corporate balance sheets. Companies have generated more cash from operations over the last several years, PwC’s analysis of cash flow statements found, and the cash they’ve spent on acquisitions has more than doubled during the latest M&A wave. As a result, cash has more closely tracked with deals than in previous cycles.

This cash isn’t evenly distributed among companies. Eight of the top 10 non-financial companies with the most cash are in the technology industry, our analysis found, and big tech companies are estimated to hold about one-third of corporate cash overall. In addition, lower tax rates after the late 2017 tax overhaul and repatriation of overseas cash have kept balance sheets flush, although some companies have used cash for share buybacks.

Private equity takes a bigger share

The capital held by US private equity (PE) firms but not yet invested has grown, more than doubling in the last seven years, according to data from Preqin. Private investors, including pension funds, family offices, high net worth individuals and others, continue to seek higher returns not afforded in more traditional investment vehicles. They also see benefits to diversification in investments, and are willing to deploy capital to explore it.

As PE firms’ share of total M&A has increased, so has the PE industry. The attraction of PE as an asset class, both in terms of the private nature of the capital and past success, has created momentum behind “mega” PE firms, which are leveraging their scale and resources to capture an increasing share of fundraising. About 45% of PE capital raised in North America between 2016 and 2018 was for just a handful of funds, according to Pitchbook.

Some PE firms have attracted other investment partners, such as sovereign wealth funds, that add to the capital supply. At the same time, they’ve diversified their tactics—inserting themselves into different parts of the capital structure—and the tools at their disposal to generate value have become more sophisticated.

Debt options evolve and expand

With historically low central bank rates since the last recession, debt has been plentiful for companies. Lower interest rates after a downturn, especially a historic one, are understandable. But those rates typically rebound in an improving economy. Instead, the slow recovery from the Great Recession and other factors have kept rates well below historical levels.

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Bank financing

The overhaul of government regulations after the global financial crisis included tighter capital requirements for banks. Commercial and industrial loans have increased overall since the last recession, but the largest banks still have to undergo a stress test every year to understand how they would be impacted in a downturn. As bank financing has become tighter compared to previous cycles, the growth in nonfinancial corporate debt has been provided by alternative sources.

Leveraged loans

Often extended to companies that already have ample debt, leveraged loans typically have higher interest rates and can be more costly than other loans but usually are more flexible than bonds. Over the last seven years, the US leveraged loan market has more than doubled. The low rate environment and tighter bank requirements have led more borrowers to leveraged loans, which some companies may find more convenient than public debt markets. As a result, roughly $1.2 trillion in leveraged loans was outstanding in 2018, or more than 10% the size of the US corporate bond market.


The amount of corporate bonds outstanding has nearly tripled since 2000, topping $9 trillion in 2018, according to Federal Reserve data. And that bond universe has broadened to include more lower-quality bonds. From 2007 to early 2019, the amount of BBB-rated bonds—the lowest investment-grade bonds—quadrupled, reaching $3 trillion. Not all of this was newly-issued bonds; some came from past rating downgrades. In 2018, for instance, $115 billion of debt was downgraded from A to BBB—a huge increase from the less than $1 billion downgraded in 2017.

The capital mix for deals going forward

As it has in past M&A cycles, the various sources of capital available for deals probably will shift as new circumstances unfold.

  • Public equity already has become less dominant in acquisitions, and it’s likely to become a smaller percentage of overall deals funding, especially if the stock market declines as usual during a downturn; sellers may be less inclined to accept shares at lower values. Such a decline also could result in fewer IPOs and even longer holding periods for private investments.
  • Bond issuances also could be weaker, as the lower-quality bonds that thrived in the latest M&A wave would see less demand in a worse economy. But some large companies in a more solid financial position still could be able to offer reliable investment grade bonds.
  • Cash will further strengthen some companies’ positions. Joined with the ample private equity dry powder, the capital mix will feature substantial liquidity. And similar to past downturns, we would expect interest rates to remain low to help stimulate the economy. That could make other debt beyond bonds a viable option for many companies.

If businesses have the appetite for M&A, the above sources of capital will provide the means. Before the economy worsens, however, corporate and private acquirers need to ensure they’re not simply relying on a big bankroll to execute deals. The next part of Succeeding through M&A in uncertain economic times outlines what businesses should do now and be prepared to do later to capitalize on M&A possibilities.

This part of the series has been updated since its original publication in November 2019. Visit our website for more on responding to the potential business impacts of COVID-19.

Contact us

Colin Wittmer

Colin Wittmer

Incoming PwC US Chief Financial Officer, PwC US

John D. Potter

John D. Potter

Deals Clients & Markets Leader, PwC US

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