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Private capital providers have high ROI expectations, survey finds

Even in the recession, private capital lenders have very high expectations for return on investment, according to a study released by Pepperdine University’s Graziadio School of Busines

Even in the recession, private capital lenders have very high expectations for return on investment, according to a study released by Pepperdine University’s Graziadio School of Business and Management.

However, the majority of private lenders anticipate continued economic decline in the year ahead will increase demand for private investment and capital will be harder to come by.

The Pepperdine Private Capital Markets Study shows venture capital providers expect 42 per cent and private equity groups expect 25 per cent return on investment. Other key lending segments also expect a high return on investment: asset-based lenders expect 11 per cent, mezzanine funds expect 18 per cent, and bank lenders expect 6.5 per cent return on investment.

The study conducted by Associate Professor of Finance John Paglia, based on interviews with 627 lending and investment professionals, was released in conjunction with a Los Angeles and California statewide economic forecast that Pepperdine partnered to deliver with Beacon Economics and the Los Angeles Area Chamber of Commerce.

The Pepperdine Private Capital Markets Study provides insights into five private market segments – banks, asset-backed, mezzanine, venture capital and private equity. In addition to return on investment, the study also gauged participants’ outlook for each industry segment and if lending would be more or less restrictive.

Of those five segments surveyed, 76 per cent believe demand for private capital will increase over the next year, while 55 per cent report that they expect a higher degree of restrictiveness of capital. An average of 60 per cent of mezzanine funds, banks and asset-based lenders believe we will see higher interest rates over the next year. Meanwhile, 55 per cent of all five market segments believe that GDP will decline during the next 12 months.

‘Professionals who work in lending either for an institution or a specific fund are excellent bellwethers for what’s ahead for other businesses and consumers,’ says Paglia. ‘The upward movement of interest rates that lenders are predicting along with more restrictive terms for obtaining capital will make it even more difficult for businesses on Main Street to survive. However, the upside is most private capital providers expect an upswing in demand for funding.’

The vast majority (76 per cent) of venture capitalist providers believe the demand for venture capital will increase over the next 12 months. Sixty-two per cent (of survey participants believe that venture capital investing in general will become more restrictive, and 30 per cent report it staying about the same over the next 12 months.

Over the next 12 months, 64 per cent of those surveyed believe that the demand by companies for private equity will increase. Nearly one-fifth (18.2 per cent) of private equity lenders said they expect an increase in demand. Over the next 12 months, 66 per cent believe that private equity investing in general will become more restrictive, while 27 per cent believe it will stay about the same.

Eighty-six percent believe that the demand for mezzanine loans will increase over the next 12 months. Sixty-four percent believe that mezzanine lending will become more restrictive over the next 12 months.

The majority of bank lenders (61 per cent) said that they believe that the demand for loans in general will increase over the next 12 months. Most bank lenders also believe that lending in general will become more restrictive (46 per cent) or stay about the same (39 per cent). In recent months, small business loan failure rates have hit 11.9 per cent and have increased steadily since 2004 when the rate was just 2.4 per cent. Only 15 per cent of those surveyed felt that lending will become less restrictive.

Almost all asset-backed lenders surveyed (97 per cent) believe that the demand for asset-based loans in general will increase over the next 12 months. Fifty-six percent believe that asset-based lending in general will stay the same, and 35 per cent believe it will become more restrictive.

Among those segments whose capital is connected to interest rates, lenders expect interest rates to climb in the next year (45 per cent of bank lenders, 62 per cent of asset backed lenders, 64 per cent of mezzanine lenders). Among those asked about US gross domestic product, study participants also said GDP will stay the same or decrease (bank lenders – 40 per cent stay the same and 30 per cent decrease; asset backed – 63 per cent say decrease; private equity investors 58 per cent say decrease).

Venture capitalists and asset based lenders are the most pessimistic about the economy as more than 60 per cent of respondents believe GDP will decline. Overall, the study found that median estimates of GDP growth are consistently negative.

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