Market conditions are now providing opportunities for private equity managers and their investors in selective areas of the market, according to research produced by professional services company Towers Watson.
The research asserts that portfolio company operating performance is stabilising, pricing for new deals is becoming more compelling from a buyer’s perspective and financing packages are increasingly available for the right businesses.
"A flurry of deal activity announced in early 2010 is testament to the potential for transactions to be created for the right businesses if managers have the skill and capacity to aggressively seek new deals," says Mark Calnan, global head of private equity research at Towers Watson. "While target companies exist across the size and geographical spectrum, we are seeing increasing opportunities in the small to mid-market buyout space and in emerging markets. There are also niche opportunities that we find attractive from a thematic perspective, such as distressed and turnaround managers, which appear to have an increasing supply of opportunities given the economic situation."
The research, entitled Private equity – emerging from the crisis, references the widely stated relationship between historic periods of economic contraction and strong vintage year performance in private equity.
However, it urges caution about the sustainability of this relationship, citing the significant capital overhang as a potential obstacle to the pattern repeating itself.
In the publication, Towers Watson emphasises that a period of anaemic GDP growth in developed markets will give those managers who are able to genuinely add value to their portfolio companies the opportunity to generate significant outperformance above equity market returns.
It also draws attention to those managers that can drive significant operating margin improvements, and those that can build market leaders in niche pockets of growth as being particularly well positioned in this environment.
"So while private equity is facing some significant headwinds that require the industry to take stock and evolve, we continue to be positive about some niches within private equity – turnaround managers, small- and mid-market buyouts and emerging markets – all of which can benefit from a depressed pricing environment and are less reliant on leverage to complete transactions," says Calnan. "The skill that enables these managers to improve the earnings of portfolio companies should differentiate them from their peers and provide further support for considering a commitment to private equity. That said, as ever, we encourage selectivity in making new commitments."
