Private equity buyout deal flow has increased over the past year, but it is very much a seller‟s market, Preqin and LexisNexis Enterprise Solutions have found.
A joint study of global private equity buyout firms has revealed that while 49% feel that the number of opportunities has increased over the past 12 months, 68% feel that these opportunities are overpriced.
Funds of vintages 2007 and 2008 account for 22% and 28% respectively of the $391 billion in dry powder available to the private equity buyout industry. As most firms employ a five-year investment period, fund managers are under pressure to put this capital to work, increasing competition for deals significantly and resulting in higher prices.
Over half of respondents believe that potential acquisitions are correctly leveraged at present
Some 27%of respondents stated that over leverage is a problem in the current market – a dramatic turnaround from the immediate post-Lehman environment, while 48% stated that the overall outlook for doing deals is strong, and just 5% felt it to be weak. A total of 29% meanwhile, felt that opportunities are correctly priced.
Personal relationships are very important when it comes to sourcing deals in such a competitive market; 32% have frequently sourced deals through personal relationships and a further 46% have done so a number of times
Some 98% of participants rely on referrals to source deals to some extent
“The results of the study suggest that the deals market is buoyant, but pressure to put capital to work is affecting pricing and the flow of potential new deals. Increased pricing has the potential to erode future returns, which will cause concern amongst institutional investors," says Manuel Carvalho, Manager – Private Equity Deals. In these competitive times, it is imperative that fund managers effectively source, manage and execute successful deals, and forming strong relationships with potential acquisitions at the earliest possible stage has become more important than ever in protecting fund IRRs.”
