Both North America and Europe are expected to see significant growth in their domestic private equity markets, according to the newly released Transatlantic Private Equity survey conducted by mergermarket and Duff & Phelps, the financial advisory and investment banking firm.
In late 2010, Duff & Phelps commissioned mergermarket to interview private equity practitioners from the US and Europe regarding their outlook for buyout and exit activity in the upcoming year. Respondents provided insight into their forward-looking plans, strategies and expectations for the transatlantic private equity market.
Private equity groups are entering the next 12 months with renewed confidence and high expectations. When asked about their targeted returns for the upcoming one to two years, three-quarters of European respondents will aim for 15% to 25% and more than half of North American respondents plan for returns 20% or greater. Survey respondents cite the much improved credit markets and record levels of cash reserves beginning to be used as the primary drivers for private equity growth.
While activity will return, respondents’ comments suggest they have learned some lessons. Almost half of overall respondents expect equity to represent more than half of the purchase price for most deals in the next 12 months, a sharp contrast to deals using 10% to 15% equity in the boom years. Leverage multiples are expected to remain at current levels in Europe; however, 36% of North Americans expect them to increase.
Portfolio company restructurings will be handled differently based on region. The majority of North American respondents (57%) intend to focus on refinancing. European respondents chose covenant negotiations (36%) as their primary method. Sophie Moreau-Garenne (pictured), managing director at Duff & Phelps elaborates: "In Europe, the high yield market is thinner and less developed and dynamic. Covenant renegotiation is the preferred option versus a straight refinancing."
