The majority of fund managers (75 per cent) think the current environment is either “somewhat” or “very favourable” for private equity funds looking to invest, according to the fourth annual PErspective Private Equity Study by BDO USA.
However, fund managers are not expecting a sudden boom in deal volume anytime soon. Fifty seven per cent of fund managers – regardless of fund size – expect to close between two and four new deals during the next 12 months, which is only a small increase from the 47 per cent of fund managers who closed between two and four new deals during 2012.
Fund managers did, however, report a more optimistic outlook than last year, when only seven per cent of respondents expected to close more than four new deals in the year ahead. Now, looking into 2013, 36 per cent of fund managers expect to close more than four new deals during the next 12 months.
“Political and regulatory uncertainty, combined with the dearth of projects meeting fund managers’ criteria, made 2012 a disappointing year for many private equity fund managers who saw both deal volume and capital invested decline,” says Lee Duran, partner and private equity practice leader at BDO. “Even so, many fund managers have taken steps to enable them to succeed in the ‘new normal’ investment environment and remain confident that 2013 will bring new opportunities to put their capital to work.”
In fact, despite fund managers’ cautious outlook regarding deal flow volume, respondents are hopeful they will continue to invest significant amounts of capital in the coming year. According to BDO’s study, nearly 10 per cent of fund managers expect to invest more than USD500m of capital during the next 12 months, and another 15 per cent expect to invest between USD101m and USD500m of capital in 2013.
Fund managers also remain confident in their primary investment strategies. Only 11 per cent of respondents have asked their limited partners to allow them to change investment strategies to broaden opportunities and only nine per cent said they will do so during the next 12 months. Fund managers at large funds – those with more than USD1bn in assets under management – were the most likely to reevaluate their investment strategies, with 22 per cent having done so in the past year and 16 per cent indicating they will do so in the coming year.
When it comes to opportunities for deal flow, secondary buyouts are expected to be a major driver in 2013. According to BDO’s study, 64 per cent of fund managers believe private equity funds exiting their current investments will be the key driver of private equity deal flow in the next 12 months. Another 14 per cent reported private equity funds investing in distressed businesses will be the key driver and 10 per cent thought it would be corporates seeking financing for strategic acquisitions.
“Secondary buyouts emerged as a prominent exit and deal-sourcing opportunity in 2012,” says Ryan Guthrie, partner in the private equity practice at BDO. “Fund managers expect this trend to continue in the New Year as private equity firms seek out opportunities to realise a return on their mature investments, many of which were made before the financial downturn.”
While exit activity may continue to increase in 2013, fund managers’ expected average holding period for individual portfolio companies is also on the rise. According to BDO’s study, the majority of private equity fund managers (82 per cent) indicated their current expected average holding period is longer now than 12 months ago. Of those with longer holding periods, the largest percentage of respondents (35 per cent) indicated their expected average holding period is now seven to 12 months longer and another 29 per cent reported it is 13 to 18 months longer. However, only six per cent (down from 19 per cent last year) of respondents indicated their expected average holding period is currently more than two years longer than it was 12 months ago.
When asked how their exit assumptions have changed when compared to 12 months ago, 35 per cent of fund managers reported an increased focus on sales to strategic buyers, 11 per cent reported an increased focus on sales to financial buyers, and nine per cent indicated an increased focus on a long-term hold. Only four per cent reported an increased focus on IPOs, up from just two per cent in last year’s study.
With the exception of IPOs, fund managers’ changes in exit assumptions correspond with their expectations for the greatest returns. The majority (64 per cent) of fund managers expect sales to strategic buyers to generate the greatest returns during the next 12 months, followed by 15 per cent who think IPOs will generate the greatest returns, and 11 per cent who reported sales to financial buyers will do so. One in ten fund managers (10 per cent) reported that exits will not generate a positive return in the current market.
With regard to investments by industry, the largest percentage of private equity fund managers identified manufacturing and technology (equally, 25 per cent) as the industries that will provide the greatest opportunities for new investments during the next 12 months. When it comes to manufacturing, that is consistent with last year’s study when 28 per cent of respondents identified it as the sector that will provide the greatest opportunities. For technology, however, that represents a marked uptick from last year, when only 10 per cent of fund managers identified it as the most attractive sector for new investments in 2012.
The healthcare and biotech industry was also identified as an attractive sector for new investments in 2013, with 19 per cent of respondents indicating that it will provide the greatest opportunities, followed by natural resources and energy (17 per cent), financial services (five per cent) and media/information (four per cent). Only three per cent of respondents indicated that retail and distribution will provide the greatest opportunities during the coming year. Similarly, the largest percentage of respondents – 24 per cent – expects to see decreasing valuations in retail and distribution during the next 24 months.
These findings are from the fourth annual BDO PErspective Private Equity Study, which was conducted from November through December 2012 and examined the opinions of more than 100 senior executives at private equity firms throughout the US with USD15m to USD157bn in assets under management.
