Chicago, IL – February 6, 2012 – The majority (63 percent) of private equity fund managers – regardless of fund size – are receiving new commitments from Limited Partners (LPs), according to the third annual PErspective private equity study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations. That’s up from 56 percent of fund managers who indicated they were receiving new commitments from LPs in 2010 and only 40 percent who said so in 2009. The largest percentage of funds indicated they are receiving the majority of first-time financial commitments from family offices (55 percent), followed by pension funds (21 percent), international investors (11 percent), endowment funds (9 percent) and insurance companies (4 percent).
"There are a significant number of funds that are either currently fundraising or planning to do so in 2012, which could lead to a marked uptick in fundraising activity in the coming year," said Lee Duran, partner and private equity practice leader at BDO. "However, it won’t all be smooth sailing on the fundraising front. The notable capital overhang of private equity funds is likely to impact commitments in the coming year as investors look for fund's cumulative distributions to increase."
In fact, despite the uptick in the number of fund managers receiving new commitments from LPs, the majority of respondents acknowledge facing challenges in regards to fundraising. When asked about the current fundraising environment, the largest percentage of respondents (35 percent) identified institutional investors reallocating their assets away from alternative investments as the most significant challenge they have faced. Another 22 percent and 12 percent, respectively, identified the quantity of private equity funds raising new funds and past funds’ track record during the recession as the number one challenges.
Funds Increase Holding Periods, Focus on Sales to Strategic Buyers
Despite the significant number of mature portfolio companies in the market, the majority of private equity fund managers (91 percent) indicated their expected average holding period is longer now than it was 12 months ago. That’s up from 70 percent who indicated the same in last year’s study. The largest percentage of respondents (31 percent) indicated their expected average holding period is 7-12 months longer, with another 28 percent indicating it is 13-18 months longer. Nearly one in five respondents (19 percent) indicated their expected average holding period is currently more than 2 years longer than it was 12 months ago.
When asked how their exit assumptions have changed compared to 12 months ago, 21 percent reported an increased focus on sales to strategic buyers, 15 percent reported an increased focus on a long-term hold and 7 percent reported an increased focus on sales to financial buyers. Only two percent reported an increased focus on IPOs.
Funds Report Hiring, Increasing Headcount at Operating Company & Fund level
For the second year in a row, the majority of private equity fund managers (62 percent in 2011 and 63 percent in 2010) reported they will increase professional staff headcount at the operating company level during the next 12 months. When asked about the past 12 months, 57 percent of respondents reported increasing professional staff headcount and another 31 percent reported increasing administrative staff headcount at the operating company level. At the fund level, 44 percent of respondents reported increasing employee count during the past 12 months and 42 percent plan to do so during the next 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 work to comply with SEC regulations: When thinking about the new requirements to register with the SEC included in the Private Fund Investment Advisers Registration Act of 2010, the largest percentage of fund managers affected by the regulation (20 percent) indicated their fund is fully compliant. Eighteen percent reported their fund is not yet compliant, but in the process of implementing the new requirements using internal staff and another 17 percent indicated they are using an outside service provider. Nearly one in 10 (8 percent) indicated their fund is not at all compliant and they have not yet started implementing the new requirements.
- Fund managers focus on strength of management at new portfolio companies. The largest percentage of respondents (46 percent) reported that they supplement the existing management team at new portfolio companies with new members and another 40 percent said they either supplement or replace management, depending on the situation. A majority of respondents (74 percent) indicated that, when they keep members of the existing management team at a new portfolio company, they always perform background checks. "Fund managers are increasingly focused on creating value by improving operational efficiencies at their portfolio companies to ultimately generate returns for their investors," said Tim Mohr, partner in the private equity practice at BDO Consulting. "Ensuring the right management team is in place to run the company is critical to driving performance."
The BDO USA, LLP 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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