CHICAGO--(BUSINESS WIRE)--Private equity leaders anticipate another year of moderate deal flow volume, according to the fifth annual PErspective Private Equity Study by BDO USA, LLP, one of the nation's leading accounting and consulting organizations. Coming off of a year when rising valuations limited fund managers’ ability to source and close deals, only 15 percent of private equity fund managers – regardless of fund size – predict they will close more than five deals in 2014. That represents a drop from 2013, when 22 percent of fund managers anticipated closing more than five deals.
Despite this bearish view, fund managers are hopeful that they will deploy more capital in the year ahead. According to BDO's study, 36 percent of fund managers expect to invest more than $100 million in new deals or add-on acquisitions in 2014, a marked increase from last year, when only 23 percent reported that they invested this same amount. Even so, fund managers are not expecting a return of the mega-deals seen before the 2008 downturn.
"Private equity transactions got off to a slow start in 2013, with highly sought-after new deals in short supply and the total volume of dry powder creeping back up," says Lee Duran, Partner and Private Equity practice Leader at BDO. "Looking to the year ahead, private equity fund managers are eager to put their capital to work and drive private equity purchases."
Exit Activity Slows, With Strategic Buyers Generating the Greatest Returns in 2014
When it comes to exit activity, fund managers are continuing to see longer holding periods, similar to the study’s findings last year. The majority of fund managers (70 percent) responding to BDO’s study cite a longer expected average holding period now than compared to 12 months ago. Of those fund managers, 53 percent report holding periods of 7-12 months longer, and 30 percent expect holding periods of 13-24 months longer than the year prior.
In addition to longer holding periods, fund managers are anticipating a shift in potential buyers. More than half of private equity fund managers (54 percent) indicate that their exit assumptions have changed, with 25 percent reporting an increased focus on sales to strategic buyers (down from 35 percent last year), and 15 percent anticipating an increased focus on sales to financial buyers (up from 11 percent). Initial public offerings (IPOs) continue to be a less favorable exit plan as only eight percent of fund managers say they are increasing their focus on the IPO market, up from just four percent entering into 2013.
In alignment with the changes to exit assumptions, fund managers anticipate the greatest returns will be generated from sales to strategic buyers. In the coming year, 72 percent of fund managers say sales to strategic buyers will generate the greatest returns, up from 64 percent the year prior. Another nine percent indicate sales to financial buyers will be the most lucrative, down from 11 percent, and seven percent predict that the IPO market will generate the greatest returns on their investments, down from 15 percent. Only 11 percent of fund managers say they are focused on long-term holds, as exits will not generate a return in the current market, up from nine percent in 2013.
"Given the strong public equity markets and the significant amount of cash that is sitting on U.S. corporations' balance sheets, strategic buyers, which have been very busy acquirers over the past few years, are likely to remain active," says Ryan Guthrie, Partner in the Private Equity practice at BDO.
Fund Managers Are Poised to Tap Asia's Potential
A plurality of respondents (32 percent) – regardless of fund size – indicate that, other than North America, Asia – including Southeast Asia – will present the greatest opportunities for new investments in 2014. That’s up from only 22 percent of fund managers who identified Asia as the market with the greatest opportunities looking into 2013.
"Up until recently, Asia hasn't been a core focus of capital due to complex market dynamics, but that seems likely to change," says Duran. “While Asia is certainly a diverse market and its private equity footprint is relatively small compared to other regions, we’re seeing that U.S. private equity firms are increasingly looking to Asia for opportunities."
South and Central America, which was considered the hottest area for investment looking into 2013 (as identified by 42 percent of fund managers last year), dropped to second place this year, with 29 percent of respondents identifying this region as having the greatest opportunities for new investments in the year ahead.
Diverging slightly from the pack, large funds – those with more than $1 billion in assets under management – indicate that Continental Europe (32 percent) and South and Central America (32 percent) will provide the greatest opportunities for new investments in the coming year, followed by Asia (18 percent).
Manufacturing Identified as the Greatest Opportunity for New Investment; Technology, Healthcare & Biotech Expected to Experience Increasing Valuations
With regard to investments by industry, when asked which sector is likely to see the greatest opportunity for new investment in the coming year, 32 percent of respondents identify manufacturing, up from 25 percent last year. Technology and healthcare & biotech have also been deemed attractive sectors for new investment in 2014, with 17 percent of respondents equally indicating that each of these sectors will provide the greatest opportunity, followed by natural resources & energy (15 percent), retail (eight percent) and media/information (six percent). Another five percent of respondents believe financial services will provide the greatest opportunities for new investments in 2014.
Despite these sectors’ attractiveness for investment in the coming year, fund managers cite both technology and healthcare & biotech (25 percent each) as the industries that are most likely to experience increasing valuations in 2014. For technology, this marks an uptick from last year, when 21 percent of fund managers identified it as the sector most likely to experience rising price expectations. For healthcare & biotech, however, this represents a slight decline from last year, when 30 percent of fund managers identified it as the sector most likely to experience increasing valuations.
These findings are from the fifth annual BDO PErspective Private Equity Study, which was conducted from November through December 2013 and examined the opinions of more than 100 senior executives at private equity firms throughout the U.S. with $30 million to $70 billion in assets under management.
Other major findings from the BDO PErspective Private Equity Study include:
- Funds Focus on Growing Existing Portfolio Companies: Ninety-three percent of fund managers indicate that they sought add-on acquisitions in 2013, and 97 percent say they plan to do so in the coming year (up from 87 percent in last year’s forecast). At the same time, 19 percent of respondents report that they directed the most capital toward add-on acquisitions in 2013, up from 14 percent in 2012.
- Fund Managers Continue to Invest from Pre-2007 Vintage: Sixteen percent of fund managers – regardless of fund size – indicate that they are still investing from vintage funds, with two-in-five mid-size fund managers – those with $500 million to $1 billion in assets under management – reporting that they are still investing in funds that closed prior to 2007.
- Fund Managers Remain Lukewarm about the Current Investment Environment: Sixty percent of fund managers say that the current environment is "somewhat favorable" for private equity firms looking to invest, and 29 percent of fund managers report that it is either "somewhat unfavorable" or "very unfavorable" at the moment, which is in line with last year's findings, in which 64 percent of fund managers said the environment was somewhat favorable and 25 percent said it was either "somewhat unfavorable" or "very unfavorable."
- Private Equity Funds Exiting their Current Investments to Drive Deal Flow: Because of pent-up demand resulting from longer average holding periods, which are anticipated to continue into 2014, the majority of fund managers (77 percent) in BDO's study expect private equity funds exiting their current investments to be the key driver of private equity deal flow in 2014, followed by private equity funds investing in distressed businesses and corporates divesting to raise cash (seven percent each).
The BDO PErspective Private Equity Study is a national survey conducted by PitchBook, an independent and impartial research firm dedicated to providing premium data, news and analysis to the private equity industry. More than 100 senior executives at private equity firms throughout the U.S. with $30 million to $70 billion in assets under management responded to BDO's latest study, which was conducted from November through December 2013.
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