Chicago, IL – January 23, 2012 – The majority of private equity fund managers (70 percent) – regardless of fund size – expect to close only two or three deals during the next 12 months, according to the third annual PErspective private equity study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations. However, that’s an increase from 2011 when nearly half (47 percent) of fund managers reported closing no new deals and another 19 percent reported closing only one new deal. Small funds – those with less than $250 million in assets under management (AUM) – were the hardest hit, with 66 percent reporting they closed no new deals in 2011.
The moderate level of deal flow during the past year reflects the quality of deals, which remained relatively consistent with the quality of deals seen in 2010. Nearly half (48 percent) of respondents reported the financial characteristics of the deals seen in 2011 were only moderately better than those seen in 2010, while another 37 percent indicated the quality was the same as those seen during the previous year. That’s compared to last year when 21 percent of respondents indicated the deals seen in 2010 were much better than those seen in 2009, another 62 percent indicated they were at least moderately better and only 14 percent indicated deal quality was the same in 2010 as in 2009.
"Private equity fund managers are approaching the new year with cautious optimism as uncertainty in Washington and Europe continues to impact the global economy," said Lee Duran, Partner and Private Equity Practice Leader at BDO. "But despite a slowdown in momentum for private equity during the second half of 2011, private equity professionals remain confident in their ability to source and close deals as the economy turns around."
In fact, the majority of respondents remain committed to their primary investment strategies. Only seven percent have asked their Limited Partners to allow them to change investment strategies to broaden opportunities and only 11 percent stated they will do so during the next 12 months.
Fund Managers Look to Invest More Capital in 2012
Despite fund managers’ cautious outlook regarding deal flow, respondents are hopeful they will deploy more capital in the coming year. According to BDO’s PErspective study, 22 percent of private equity fund managers – regardless of fund size - expect to deploy $30 million to $50 million of capital through new deals and add-on acquisitions in the coming year and another 16 percent expect to invest $51 million to $100 million. That’s compared to only 10 percent and 11 percent of funds that reported investing the same amount, respectively, during the previous 12 months. Middle market funds – those with $250 million to $500 million in AUM – expect the most significant uptick with almost double the percentage of respondents (88 percent) predicting they will invest $30 million or more during the next 12 months versus only 45 percent who reported investing that amount during the trailing four quarters.
Portfolios Are in the Black, but Individual Companies Continue to Face Hard Times
The majority (67 percent) of private equity professionals surveyed saw the overall value of their entire current portfolio increase during the past 12 months. That’s down slightly from last year’s study when 70 percent of respondents saw such an increase. However, when it comes to individual portfolio companies, 21 percent of respondents indicated that "none" of their portfolio companies are performing below forecasts or expectations (an uptick from 2010 when only 10 percent of respondents reported the same). That said, many companies continue to struggle in the current economy with the largest percentage of respondents (22 percent) indicating that more than 20 percent of their portfolio companies are currently performing below forecasts or expectations.
"The stagnant global economy continues to impact funds’ ability to grow their portfolios," added Scott Hendon, Partner in the Private Equity Practice at BDO. "However, strategic fund managers are taking steps now to mitigate losses and ensure they are well positioned to maximize the return on their investments as the market rebounds."
Funds Continue to Mitigate Losses; Bankruptcies Decline
In fact, for the third year in a row the majority of respondents are taking steps to improve the bottom-line at their portfolio companies. Sixty-one percent of respondents to this year’s study have reduced headcount at portfolio companies performing below forecasts or expectations during the past year. Another 62 percent have reduced costs by scaling back, 72 percent have reassessed market strategy, 64 percent have renegotiated debt and 74 percent have monitored cash flow on a weekly basis.
Private equity professionals appear confident these efforts will continue to pay off. While 11 percent of respondents reported declaring bankruptcy for one or more portfolio companies during the trailing 12 months, only three percent expect to do so in the coming year.
These findings are from the third annual BDO PErspective Private Equity Study, which was conducted from October through December 2011 and examined the opinions of more than 100 senior executives at private equity firms throughout the U.S. with $10 million to $72 billion in assets under management.
Other major findings from the BDO PErspective Private Equity Study include:
- Funds Increase Focus on Add-on Acquisitions: The majority of private equity funds (71 percent) directed the most capital toward new deals in 2011. However, there was an uptick in the number of funds reporting that they deployed the most capital toward add-on acquisitions during the past 12 months (13 percent in 2011 versus only 6 percent in 2010). Looking ahead, 95 percent of respondents indicate they will seek add-on acquisitions in the coming year. That’s up from 88 percent of private equity funds that sought add-on acquisitions during the trailing four quarters.
- Fund Managers Expect Leverage Ratios, Cost of Capital to Rise: Of respondents who used leverage in their last deal, 39 percent indicated 41% to 60% of the deal value was debt. Looking ahead, 48 percent expect 41% to 60% of the value of their next deal to be debt. Similarly, there was a drop in the percentage of respondents not planning to use debt at all in their next deal. While 18 percent of respondents indicated they did not use leverage in their last deal, only 9 percent are not planning to use leverage in their next deal. When it comes to capital, the largest percentage of respondents (45 percent) expects the cost of capital to increase by up to 200 basis points during the next 12 months given the recent discussions regarding the U.S. and global deficits.
- South and Central America Overtake Asia as the Area with the Greatest Opportunity for New Investments: The largest percentage of respondents (36 percent) believe that, other than North America, South and Central America will have the greatest opportunities for new investments during the next 12 months, followed by Asia (27 percent). That’s a switch from last year when 20 percent and 59 percent saw opportunities in South and Central America and Asia, respectively. Eighteen percent of respondents identified Continental Europe as the area with the greatest opportunity for new investments, followed by the Middle East and Africa (15 percent) and Eastern Europe, including Russia (four percent).
- Manufacturing Attracts Investors, Followed by Healthcare: Private equity professionals continue to see the greatest opportunities for new investments in the next 12 months in the manufacturing (28 percent) and healthcare and biotech (21 percent) industries. However, that’s down slightly from last year when 37 percent and 23 percent of respondents saw the greatest opportunities for new investments in manufacturing and healthcare respectively. Thirteen percent of respondents expect the greatest opportunities to be in natural resources and energy, followed by technology (10 percent), financial services (eight percent) and retail and distribution (six percent). Only five percent of respondents believe there are opportunities in media/information during the coming year.
The BDO PErspective Private Equity Study is a national survey conducted by PitchBook, an independent and impartial research firm dedicated to providing premium data, news and analysis to the private equity industry. More than 100 senior executives at private equity firms throughout the U.S. with $10 million to $72 billion in assets under management responded to BDO’s latest study, which was conducted from October through December 2011.
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