London 6 April 2010: While 2009 was a challenging year for private equity (PE) on all fronts, it has offered a window into the industry’s flexibility in adapting to a changing economic environment. 2010 is already exhibiting more robust global PE activity as funds look to invest and divest in a more stable economic setting, according to a new report released today by Ernst & Young.
2010 global private equity watch: New horizons emerge, finds that PE was bouncing back in the third quarter of 2009 and gained strength as larger deals were announced towards year-end. This momentum and trend carried into the first quarter of 2010 where deal value rose 59% to US$27b from 358 global PE transactions, compared with US$17b from 415 in the same period last year.
The report also reveals that the gap between the average value of a PE divestiture, excluding initial public offerings, and an acquisition is much wider during down markets and narrows during economic booms. Last year, the average PE firm paid US$100m per acquisition, while divestitures yielded US$321m, a gap of US$221m, down from $323m in 2008. The last time average exit values were US$321m and average investment values were approximately US$100m was in 2001.
“Valuations are improving, IPOs are encountering resistance, leverage is returning in some markets, and some high-profile secondary sales have been completed. Firms are taking advantage of improving markets to make acquisitions, enhance portfolio company performance, and exit investments in order to return funds to limited partners in advance of 2011 fund-raising rounds,” said John Harley, Global Private Equity Leader at Ernst & Young.
“Firms will continue to focus on portfolio company performance and keep a watchful eye on debt covenants. Additionally, leverage is starting to become more readily available, particularly in the US. Challenges remain to be played out in the next few years, including an uncertain regulatory and tax landscape, a difficult fund raising environment and a continued concern over debt maturities.”
Globally, in 2009, overall PE announced deal volume fell 35% to 1,612 as deal value fell 56% to US$95.5b from 2008 levels.
Private equity exits in vogue, competition for quality targets likelyWhile the number of PE acquisitions will gradually increase, PE exits will gain momentum after a dry spell that lasted six consecutive quarters until exits re-emerged in the third quarter of 2009. During the first quarter of 2010, there were 104 announced deals for which the seller was a PE firm, up from 78 during the same period in 2009. Also in this period, there were 22 PE-backed IPOs on global exchanges, while there was only one for the same period last year. The pace of exits will accelerate as the year progresses.
"The competition for deals will likely intensify as well funded corporates enter the market both to sell non-core operations and to acquire businesses. We are already seeing examples of heated auctions occurring but also situations where price expectations of the sellers - bolstered by rising stock markets - well exceed buyer expectations,” says Harley.
Emerging markets draw greater private equity interestEmerging markets, less affected by the recession, are leading the worldwide economic recovery and have seen their share of PE deal activity increase in recent years. Over the last decade, PE firms invested US$7.3 b in Brazil, US$25.8b in China and US$23.4b in India.
In 2000, PE investments in these three geographies were US$183m, US$80m and US$1.1b, respectively. These numbers are expected to increase as there are an increasing number of funds raised from 2003 to 2009 with a global investment focus.
Harley adds: “Emerging markets could gain a larger share of deal activity, as firms conclude that the prospect of earning better returns than in developed markets outweighs risks arising from political, structural market and legal uncertainties. Some have even contended that emerging market investments may actually carry less risk than those in developed markets because many of the destabilizing factors that caused the ”Great Recession” either do not exist or are not as prevalent in emerging economies.”
2010 outlookCurrent signs indicate the outlook for 2010 is encouraging, with more deal activity and PE exits on the horizon. More transactions are expected to be announced and completed in 2010 than in 2009. However, deal size is expected to be smaller than a few years ago, with most transactions registering below the US$2b level.
Harley concludes: “Expect to see much more competition for deals as the reduced transaction size brings more funds into the picture when an asset is being marketed. Emerging markets will continue to be a focus going forward as funds become more comfortable with investing in the lesser developed economies.
“Firms that will thrive in the complex 21st-century world will be those nimble enough to seize the opportunities that are difficult and uncertain economy presents. Those firms that differentiate themselves in the coming years will emerge stronger in the competition for a more limited capital pool, while less successful funds will have a difficult time competing.”
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