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Private equity houses shy away from new deals, says Grant Thornton survey

The vast majority of private equity firms will be doing fewer deals for less money over the coming 12 months, as the industry reveals its most pessimistic transaction outlook in at least f

The vast majority of private equity firms will be doing fewer deals for less money over the coming 12 months, as the industry reveals its most pessimistic transaction outlook in at least five years, according to the latest Grant Thornton Private Equity Barometer.

In the quarterly survey of 100 private equity executives, 85 per cent predicted deal values would fall over the coming year, up from just 13 per cent who foresaw deal values falling at the same time last year, and 69 per cent in the first quarter of 2008.

The number of deals being completed in the coming 12 months is also predicted to fall, with 64 per cent of private equity houses foreseeing a drop, compared with just 10 per cent a year ago and 33 per cent in the last quarter. It is the most pessimistic deal sentiment expressed by the industry since the survey series began in 2003.

According to David Ascott, head of private equity at Grant Thornton, ‘wait and see’ is now the order of the day as private equity firms hold tight for better economic conditions in order to be able exit with returns approaching those envisioned when investing initially.

‘The stubbornly cautious sentiment in the market reflects the fact that there have been many PE deals caught out due to the credit crunch and rapidly changing economic situation, as business values have dropped and certain sectors face an tumultuous short-term outlook.’ Ascott says.

‘Now that we are beginning to see a significant adjustment, private equity houses may now look to acquire at lower multiples, while still targeting risk-adjusted returns. But it is the companies that were bought just before the credit crunch started to bite that are most likely to be causing some pain. These are the deals forcing the lack of movement.’

However, 84 per cent of private equity executives expect their own portfolio companies to grow in the coming 12 months, including 37 per cent that foresee substantial growth. Just 2 per cent of the executives polled expect to make portfolio company redundancies, while 59 per cent actively plan to increase staff levels.

‘Most private equity firms have the ability to take a longer-term view, offering the ability to consolidate business portfolios and focus on fundamentals rather than having to push through the sale of a company in a given timeframe,’ Ascott says. ‘It is hard to make the label of asset strippers stick when you consider the long-term position most private equity houses are now taking.’

Caution is set to last for some time yet, with the majority of executives now expecting the effects of the credit crunch to continue for at least another year. Sixty per cent say the crunch will last another 12 to 24 months, and 9 per cent expect it to last even longer.

The sector set for the greatest interest from private equity over the next 12 months is business services, particularly facilities management, with 55 per cent of executives surveyed saying they would be likely invest in this area.

Second was a perennial favourite, health care, with 39 per cent of executives looking at opportunities in the sector, followed by financial services with interest from 21 per cent of private equity houses.

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