Uneven portfolio company performance may be driving private equity fund managers’ modest expectations in 2016, according to the seventh annual PErspective Private Equity Study by BDO USA.
Twenty-two per cent of fund managers surveyed report that 16 to 20 per cent of their portfolio companies are performing below forecast, while another 20 per cent of respondents say more than 20 per cent of their portfolio companies are underperforming. However, the majority of respondents say that 15 per cent or less of their portfolio companies are missing the mark, and 17 per cent say that none of their portfolio companies are underperforming, the highest proportion since 2011.
“2015 was a year of mixed blessings for private equity funds. Though the US saw solid signs of economic recovery, not all industries felt relief,” says Lee Duran, partner and leader of BDO’s Private Equity practice. “Portfolio companies in struggling sectors – such as natural resources and certain retail segments – are still hurting, and PE firms may be less inclined to invest in those industries until they begin to demonstrate signs of sustainable recovery. However, we still expect to see robust investment in industries with a stronger market position or the ability to leverage new technologies to build new customer bases, cut costs and improve productivity.”
The outlook for portfolio companies is not universally gloomy, but the risk of bankruptcy has increased for a small proportion of respondents this year. Eight per cent of fund managers say they are likely to declare bankruptcy for one or more portfolio companies in the coming year, up from 3 per cent of respondents expressing similar sentiments last year. By way of comparison, 13 per cent of fund managers report declaring bankruptcy for one or more portfolio companies in 2015, roughly consistent with the number who did so in 2014 (12 per cent) and up from 8 per cent in 2013.
When it comes to addressing underperforming portfolio companies, cost reduction programs and re-evaluating market strategies are leading tactics for fund managers, with 77 per cent of respondents reporting that they have employed these approaches. Meanwhile, just 27 per cent say they have engaged a turnaround professional.