Private equity ready to do deals, but quality of transactions and economic concerns remain

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  • 43% of PE investors intend to sell more assets in next 12 months
  • Confidence in the global economy has declined from 46% to 23% in six months, but fundraising expectations have improved
  • “Transactions fees” not so important for limited partners

London, 22 October 2012 – The latest EY Private Equity Capital Confidence Barometerhas found that Global PE investors are ready and willing to do deals and 43% intend to sell more assets in the next twelve months. However, over a third of PE firms (35%) showed concern about the quality of the deals currently on the market. This is according to a panel of 100 PE investors, surveyed in September 2012.

These concerns are offset by PE firms’ indications that the fund-raising environment is improving and that credit remains available for new deals. While confidence in the global economy has declined from 46% to 23% since April 2012, two-thirds of PE respondents said that their fund-raising expectations had improved or stayed stable compared with 12 months ago. In addition, half of the respondents (49%) believe they will be able to fund transactions with 35% or less of equity in the next 12 months. This positive outlook, combined with significant amount of unspent capital, is contributing to a strong incentive for PE firms to invest.

Jeffrey Bunder, EY’s Global Private Equity Leader comments: “Concerns about the number of quality assets on the market and the number of funds chasing these businesses will affect PE's ability to do new deals. The overall economic environment remains an obstacle but credit availability and recent improvements in fund raising will sustain activity levels. PE firms have significant capital to invest and continue to search for good-quality deals in this tough environment, when compared to their corporate peers, who are less confident in pursuing M&A in this environment.”

PE’s look to optimize their portfolio companies
The survey found that 43% of PE investors in all regions anticipate selling more assets (in terms of value) over the next 12 months, and 78% of respondents believe that exits to other PE firms will see a significant increase in the coming year. After a strong year for PE-backed IPOs, only 22% anticipate exits through IPO to increase. Half of the PE respondents believe sales to strategic buyers will increase.

Jeffrey continues: “With the majority of corporations intending to invest in smaller M&A deals, (around US$500m and less) and the IPO market remaining volatile, PE firms need to better position their portfolio companies for all potential exit opportunities. Successful sales to corporations can happen if PE owners clearly articulate how the assets will provide accretive growth to corporate acquirers.”

PE firms continue to look for every opportunity to optimize their portfolio companies – 86% indicated they would increase sector-focused operating partners. Forty-nine percent also expect to pursue bolt-on acquisitions for their portfolio companies in the next 12 months.

“Transactions fees” not so important for limited partners
PE firms say that the key issues for institutional investors continue to be the quality of the PE team and the performance of its previous funds. When asked what will be the most important consideration for Limited Partners (LPs) when investing in a new fund, 34% of PE respondents indicate “team quality and historical results” as most important, as opposed to “management and transaction fees” (7%).

Unlike Asia-Pacific and North American PEs, 33% of Western European PEs believe that fund diversification (in terms of product and geography) will be the most pressing issue for LPs, meaning a possible reluctance to invest in funds within the Eurozone.

Says Jeffrey: “Fund performance and quality of the team continue to be critical considerations for LPs when committing to new PE funds. Management and transaction fees and the transparency of LP reporting are not perceived to be significant issues, indicating that PE’s efforts to increase interactions and alignment with LPs are paying off”.

PE outlook
Jeffrey concludes: “Continued uncertainty in the Eurozone and slowing growth in key markets will continue to be top of mind for both PE investors and corporate executives. Pressure on profits and tighter regulation will also remain a concern. In response, PE firms will continue to drive operational improvements to enhance margins and increase the focus on managing risks such as counterparty and foreign exchange.”

Note to editors

About the survey
The EY Capital confidence barometer is a regular survey of senior executives from large companies around the world conducted by the Economist Intelligence Unit (EIU). For the seventh Capital Confidence Barometer, we once again polled private equity (PE) participants using separate, but related survey.

This PE subset of our findings gauges PE investors’ confidence in the economic outlook and identifies key trends and practices in the way PE firms manage their capital agendas. 

Profile of respondents:

  • Panel of 100 PE investors surveyed August through September 2012; in addition to our overall sample of 1500+ corporate executives from 41 countries and 24 sectors
  • 45% respondents from firms with more than US$5b in assets under management

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