The majority of private equity fund managers (70 per cent) – 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 organisations.
However, that’s an increase from 2011 when nearly half (47 per cent) of fund managers reported closing no new deals and another 19 per cent reported closing only one new deal. Small funds — those with less than USD250 million in assets under management (AUM) — were the hardest hit, with 66 per cent 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 per cent) of respondents reported the financial characteristics of the deals seen in 2011 were only moderately better than those seen in 2010, while another 37 per cent indicated the quality was the same as those seen during the previous year. That’s compared to last year when 21 per cent of respondents indicated the deals seen in 2010 were much better than those seen in 2009, another 62 per cent indicated they were at least moderately better and only 14 per cent 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," says Lee Duran (pictured), 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 per cent have asked their Limited Partners to allow them to change investment strategies to broaden opportunities and only 11 per cent stated they will do so during the next 12 months.
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 per cent of private equity fund managers — regardless of fund size – expect to deploy USD30 million to USD50 million of capital through new deals and add-on acquisitions in the coming year and another 16 per cent expect to invest USD51 million to USD100 million. That’s compared to only 10 per cent and 11 per cent of funds that reported investing the same amount, respectively, during the previous 12 months. Middle market funds — those with USD250 million to USD500 million in AUM — expect the most significant uptick with almost double the per centage of respondents (88 per cent) predicting they will invest USD30 million or more during the next 12 months versus only 45 per cent who reported investing that amount during the trailing four quarters.
The majority (67 per cent) 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 per cent of respondents saw such an increase. However, when it comes to individual portfolio companies, 21 per cent of respondents indicated that "none" of their portfolio companies are performing below forecasts or expectations (an uptick from 2010 when only 10 per cent of respondents reported the same). That said, many companies continue to struggle in the current economy with the largest percentage of respondents (22 per cent) indicating that more than 20 per cent of their portfolio companies are currently performing below forecasts or expectations.
"The stagnant global economy continues to impact funds’ ability to grow their portfolios," says 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 maximie the return on their investments as the market rebounds."
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 per cent of respondents to this year’s study have reduced headcount at portfolio companies performing below forecasts or expectations during the past year. Another 62 per cent have reduced costs by scaling back, 72 per cent have reassessed market strategy, 64 per cent have renegotiated debt and 74 per cent have monitored cash flow on a weekly basis.
Private equity professionals appear confident these efforts will continue to pay off. While 11 per cent of respondents reported declaring bankruptcy for one or more portfolio companies during the trailing 12 months, only three per cent 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 US with USD10 million to USD72 billion in assets under management.
