Last year proved to be a challenging year for the private equity (PE) industry as market instability and political uncertainty took hold worldwide. But 2017 has ushered in a more optimistic outlook, according to BDO’s Eighth Annual PErspective Private Equity Study.
When the initial survey of 200 fund managers across North America and Western Europe was conducted in October 2016, more than half (56 per cent) of fund managers characterised the investment environment as favourable, while 44 per cent said it was unfavourable—the highest proportion since 2014. In a follow-up poll conducted in early January, however, the number of fund managers reporting optimism jumped to 71 per cent.
“We believe 2016 served as something of a reset for the private equity industry, which experienced a rocky 2015. But as we look ahead to 2017, there is plenty of reason for optimism. The economy is on the upswing, deal flow is increasing and fund managers are eager to deploy uninvested capital in the year to come,” says Scott Hendon, partner and leader of BDO’s Private Equity practice.
Underlying this substantial growth in optimism may be easing economic uncertainty across the business landscape. The 2016 General Election cycle – in conjunction with other major developments, including the shockwaves of Brexit, the contraction of the Chinese economy early in the year and continued volatility in commodity prices – created significant market fluctuations throughout the year. In October, 45 per cent of fund managers said a transition in the presidential administration was their top global political concern, followed by Brexit (19 per cent) and sovereign debt crises (14 per cent).
In the days following the election, however, markets began to stabilise, the Dow increased to record highs and the Bureau of Labor Statistics issued a solid December jobs report. With the election over, PE fund managers appear to be mirroring the optimism reflected in the equity and labor markets.
“Election years always carry some degree of uncertainty for the PE community, but 2016 was a particularly contentious and volatile year,” adds Dan Shea, managing director with BDO Capital Advisors and a member of BDO’s Private Equity practice. “Still, improving fund manager sentiment likely has less to do with who won the election and more with the fact that it’s over. It’s easier for fund managers to plot their strategy with such a huge unknown out of the mix.”
These findings are from the BDO PErspective Private Equity Study, a global survey of more than 200 private equity fund managers conducted by PitchBook, an independent and impartial research firm dedicated to providing premium data, news and analysis to the private equity industry.
Reflecting the PE industry’s renewed optimism is improved sentiment toward the IPO market, which experienced a painful 2016. When asked which factor most contributed to 2016’s disappointing IPO environment a plurality (31 per cent) point to high volumes of M&A activity, followed by poor IPO performance (28 per cent) and a slowing global economy (24 per cent). Amid this uncertainty and pessimism, in October, just 4 per cent of fund managers surveyed said an IPO was likely to be the most lucrative exit option in 2017. By January, that proportion had doubled to 8 per cent, suggesting that the IPO market may be heating up as 2017 gains momentum.
Similar to IPOs, 2016 was a difficult year for overall deal flow. In our 2016 PErspective Study, one-quarter of fund managers anticipated investing USD10 to USD29 million in new deals and add-on acquisitions; however, this year’s data finds that 26 per cent of respondents invested less than USD10 million last year. Looking ahead to 2017, though, fund managers are realigning their expectations. Consistent with prior years, the largest proportion of respondents (28 per cent) say they plan to close two new platform deals in the coming year, and 25 per cent are looking to invest USD10 to USD29 million once again. When asked about the key drivers of PE deal flow in the coming year, private company sales and capital raises are most frequently cited (33 per cent), and PE exits are the second-most-cited at 30 per cent.
This year’s survey marks the least optimistic year for fundraising since 2014, with just 53 per cent of fund managers saying they are raising new funds from limited partners. This is down from 64 per cent last year, 74 per cent in 2015 and 61 per cent in 2014. Family offices remain the most common source of funds, with 46 per cent of fund managers saying this investor segment provides the majority of their financial commitments. Larger firms (USD501M in AUM and up) tend to skew more heavily toward pension funds, which is consistent with last year.
In 2016, many market analysts expected to see investor appetite for technology companies right-size after years of skyrocketing valuations. Despite some significant sector setbacks—such as the downfall of laboratory testing company Theranos – PE fund managers remain bullish on the industry, with two-thirds expecting to see increased valuations in the year ahead. At the same time, 70 per cent expect to see valuations grow in the healthcare and biotech industry in the year ahead. Meanwhile, in a reflection of growing stability in the energy space, 44 per cent of fund managers say the natural resources industry will see increasing valuations in the coming year, up from 36 per cent last year and 34 per cent in 2015.
