As private equity executives and casual observers well know, deal announcements often come with price appreciation (at least initially) for the company of interest. In addition to the company specific pop in asset value, potential private equity deal flow announcements can have market-wide impacts. Here is what those raw market-wide impacts look like for the first nine months of 2013.
In looking at the data, it is tough to say that private equity deal announcements have had any consistent, market-wide impacts.
Because the line charts make it difficult to see any relationship, let’s look at a scatterplot of the relationship between the S and P 500 and the total private equity dollar deal volume (below). As any numbers hobbyist or professional statistician might have expected, the scatterplot doesn’t provide much more information to the question on interest. Overall, the scatterplot shows a slightly positive relationship, which is encouraging, although, the linear regression line is not statistically significant (p value is 0.42).
It looks as though some real econometrics is needed to investigate whether there has been an impact on the overall equity markets (as measured by the S and P 500) and total private equity dollar deal announcements. The remainder of this post looks into this question.
A number of empirical methods could be used as the guide to investigate the relationship (for individuals interested, this link provides some background on event study econometrics). Because the relationship involves many events, the simplest method to look for any relationship is a dynamic regression that controls for various correlating problems, such as autocorrelation and overfitting. The following table and graph contains the simplest results. (The analysis was performed using Forecast Pro software.)
Interestingly, the regression shows a positive, and statistically significant, relationship between total private equity dollar deal announcements and performance of the S and P 500. The estimated coefficient comes out at 0.000555.
What does the 0.000555 mean? This means that, on the whole, total private equity deal volume announcements through the first week of 2013 has increased the S and P 500 value by about 125 points, or about 8.8 percent of the total 17.7 percent year to date return. The 8.8 percent effect equates to about $141 billion in increased wealth from the $1.6 trillion S and P 500 value (the $1.6 trillion represents the value of the companies underlying the S and P 500).
Now, the $141 billion may be high or low in its effect (probably low given that $1.6 trillion figure is just the underlying value of companies that make up the S and P 500), but one thing is generally consistent in the analysis of the data: private equity deal volume announcements have had a positive, and probably statistically significant, impact on overall market-wide returns.
Overall, private equity deal flow announcements through the first week of October 2013 amount to $226 billion. In inspecting what the effect private equity deal volume might have had on total market value so far this year, the figure comes out to $141 billion. Interestingly, private equity deal announcements have wider effects than just the private equity business.
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