Survey: Faster Pace, Larger Deals on Tap
A BDO poll of dealmakers indicates use of leverage is also increasing.
January 14, 2011
Private equity fund managers expect to close more new deals in the coming year than they did during the past 12 months, according to a survey released this week by BDO USA.
Just under half of the respondents, or 49% of those surveyed, expect to close three or more deals during the next 12 months. By comparison, only 31% reported closing three or more deals during the past year.
Nearly two-fifths of respondents, or 38%, expect to close between three and five new deals in the coming year, while only 16% reported closing between three and five new deals during the past 12 months.
However, private equity professionals do not expect deal flow to bounce back to pre-recession levels anytime soon; 69% of the respondents do not expect deal flow volume to return to 2007 highs until 2012 or later. Another 18% believe deal flow volume will never return to 2007 levels.
“We’ve seen a steady increase in private equity activity in 2010 and while private equity professionals are not expecting a sudden boom, they are optimistic that this positive momentum will continue in the new year,” Lee Duran, a partner and private equity practice leader at BDO, said in a press release.
“With the increasing availability of debt and appetite for large deals returning, it’s likely that funds will be looking for not only more, but larger deals in 2011,” he said. Sponsors, regardless of fund size, expect to deploy more capital in 2011 than they did in 2010. Among respondents with between $250 and $500 million in assets under management, 19% reported investing less than $10 million of capital through new deals and add-on acquisitions during the past 12 months. Only 4% expect to invest less than $10 million in the coming year.
Among funds with between $500 million and $1 billion in assets under management, 63% expect to invest $51 million or more in the next 12 months. By comparison, only 43% reported investing $51 million or more in the past 12 months.
“There’s actually a lot of dry powder in funds that did not return some capital to investors in 2008 and 2009 that is now being put to work more,” Duran said in an interview.
While a number of funds are embarking on their next round of fund raising, Duran said there are also plenty of existing funds with a lot of “dry powder,” or committed capital, that they were not able to put to work in 2008 and 2009. “It looks like they are little more confident that they don’t need to return the excess funds” to limited partners, he said.
The study, which was conducted during November through December 2010, examined the opinions of more than 100 senior executives at private equity firms throughout the U.S. with $30 million to $35 billion in assets under management.
A greater number of respondents, 74%, directed the most capital toward new deals in 2010, compared with just 56% in a similar survey conducted in 2009. Only 6% of respondents indicated they deployed the most capital toward add-on acquisitions in the past 12 months, versus 27% percent of respondents in 2009.
Leverage ratios continue to rise, nearing pre-recession levels. Of respondents who used leverage in their last deal, 42% indicated that 40% to 60% of the deal value was debt. But 57% expect to 40% to 60% of the value of their next deal to be debt.
Similarly, while 23% of respondents indicated they did not use leverage in their last deal, only 13% are not planning to use leverage in their next deal. Outside of the North America, Asia is still cited by the largest number of respondents, 59%, as having the greatest opportunity for new investments, although that figure is down from 66% in the year-earlier survey. But an increasingly number of respondents, 20% versus 9% in the previous survey, identified South and Central America as having the greatest opportunity, outside of North America.
By industry, manufacturing is cited by the greatest number of private equity professionals, 37%, as providing the most performance over the next 12 months, followed by healthcare and biotech, cited by 23%.
That’s a switch from the previous survey, when 35% and 21% of respondents saw opportunities in healthcare and manufacturing, respectively.
