Private Equity Firms “Go Global” in the Face of Slowing Growth, According to Grant Thornton

Canadian private equity firms must continue to expand global horizons for growth

TORONTO--()--Private equity firms around the world are bracing for tough conditions for both fundraising and deal-making, according to Grant Thornton International Ltd’s Global Private Equity Report. Now in its second year, the report is the result of 143 in-depth interviews with senior private equity practitioners around the globe.

“A central role of the private equity community is to seek new growth opportunities and then act as a catalyst for that growth. Many of today’s investors are finding themselves at the centre of the evolution of a truly global economy and the continuing search for new corporate frontiers,” says Tim Oldfield, Partner, Corporate Finance, Grant Thornton LLP.

“The report highlights that the search for profitable growth remains fundamentally about strategy rather than pure geographical expansion. Growth remains the key, and is driving the globalization of the private equity industry, including Canada,” he adds. “At the same time, private equity is also acting as a driver of globalization. Canadian private equity firms need to grow outside the Canadian market.”

The report provides insight into the expectations of private equity general partners (GPs) for numerous aspects of the fundraising and investment cycle. It shows, among other things:

  • Indonesia, Peru, Colombia and Turkey top the list of new “high growth” markets where private equity is likely to see the most opportunities;
  • deal activity expected to slow in China and India;
  • foreign trade buyers seen as most likely exit route (particularly Japan, China and Korea);
  • a dramatic drop in fundraising confidence and economic outlook.

Fundraising fears
This year’s report sees a marked decline in fundraising expectations of GPs around the world, with nearly three-quarters (72 percent) describing the fundraising outlook as either “negative” or “very negative”. In 2011, the figure was just 46 percent. The most dramatic decline in optimism from 2011 is evident in the BRICS: Brazil, Russia, India, China and South Africa. This year, 78 percent of respondents in these markets described the fundraising outlook as “negative” or “very negative”. In 2011, the figure was 39 percent.

Private equity firms looking for new investors
Private equity firms are expecting to have to turn to a greater number of new investors – or limited partners (“LPs”) – and rely less on their existing LPs to make follow-on commitments to their next funds. This year, 40 percent of respondents said they expect their next fund to be majority funded by first time investors. In 2011’s report, this figure was only 24 percent.

Global exit routes
Private equity firms are looking across borders for exit routes, in particular to overseas trade buyers. More than half of respondents (52 percent) expect the majority of the trade buyers they transact with in the near term to be foreign, while a further 20 percent expect the split between foreign and domestic buyers to be 50-50. Only 28 percent expect to deal mostly with domestic trade buyers. Globally, China and Japan, Europe and North America are the regions from which most GPs expect non-domestic strategic buyers to originate.

Regions as expected sources of non-domestic acquirers

China, Japan, Korea   31%
Europe 24%
North America 22%
South East Asia 11%
India 10%
MENA 1%
Africa <1%
Latin America <1%
Russia <1%

Top ten “high growth” markets
While growth in “high-growth” countries outstrips that seen in Western markets, the search for growth leaves local private equity firms to keep a watchful eye on where tomorrow’s deal-flow will originate. While a move to new unknown territories may be a risk too far for many Western funds, investors based in regions such as Canada typically have good visibility on the next frontier markets.

1   Indonesia
2 Peru
3 Colombia
4 Turkey
5 = Myanmar
5 = Egypt
5 = Saudi Arabia
8 = Mexico
8 = Ghana
8 = Malaysia

Economic sentiment worsens
The drive to harness growth is set against a backdrop of deteriorating sentiment around the global economy. Nearly half (48 percent) of this year’s respondents have either a negative or neutral economic outlook for their portfolio businesses. This compares unfavourably with last year’s survey, in which only 38 percent of respondents held these views.

Deal slowdown in China and India
While respondents globally expect private equity investment activity to increase over the coming year, expectations are more cautious than they were in 2011 and differ significantly from region to region. New deal activity in Western Europe is widely expected to remain subdued, with only 27 percent of respondents predicting an increase in the next 12 months. This contrasts with North America, where 59 percent of respondents predict an increase, and Middle East/North Africa, where the figure is 60 percent.

Expected investment activity by region

Region   Increase   Same   Decrease
Asia Pacific 50% 44% 6%
China 33% 11% 56%
India 33% 22% 45%
Latin America 78% 22% 0%
MENA (Middle East & North Africa) 60% 33% 7%
North America 59% 41% 0%
Western Europe 27% 64% 9%

There is an enormous expectation for growing new deal activity in Latin America with 78 percent reporting that they expect an increase. This represents only a slight dampening of last year’s sentiment, when 89 percent of respondents expected deal activity to increase in the region.

Click here to download a copy of the Global Private Equity Report. Tim Oldfield, CA, CFA and Corporate Finance Partner at Grant Thornton LLP, is available for interviews.

About the survey
Between July and September 2012, 143 interviews were conducted with top executives from private equity firms. Respondents included general partners in five principal regions/categories: 32% from Western Europe, 21% from North America, 26% BRICS (Brazil (and broader Latin America), Russia, India, China, South Africa), 11% Asia Pacific and 10% MENA (Middle East and North Africa, including Turkey). Interviews included a mixture of quantitative and qualitative questions. Arbor Square Associates, an independent research firm, conducted the research.

About Grant Thornton LLP
Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. We help dynamic organizations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has approximately 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member firms operate in close to 100 countries worldwide.

All references to Grant Thornton International in the press release and this “Notes to editor” section are to Grant Thornton International Ltd. Grant Thornton International Ltd is a non-practicing, international umbrella entity organized as a private company limited by guarantee incorporated in England and Wales.

Contacts

Grant Thornton LLP
Tania Freedman, +1 (416) 647-2745
Senior Manager, Media Relations
tania.freedman@ca.gt.com

Release Summary

Private equity firms around the globe are bracing for tough conditions says new survey.

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Contacts

Grant Thornton LLP
Tania Freedman, +1 (416) 647-2745
Senior Manager, Media Relations
tania.freedman@ca.gt.com