BDO Private Equity Study 2012

BDO Private Equity Study 2012

• 1.
  Spring 2012 www.bdo.com Executive Summary BDO USA, LLP’s Private Equity Practice Strategically focused and remarkably responsive, the experienced, multi- disciplinary partners and directors of BDO’s Private Equity practice provide value-added assurance, tax and consulting services for all aspects of a fund’s cycle, wherever private equity firms are investing. Contact: Scott Cacurak, San Francisco 415-490-3232 / [email protected] Private Equity Professionals Alfred Cepero, Miami 305-381-8000 / [email protected] Express Cautious Optimism Wayne Corini, Washington, D.C. 301-634-4910 / [email protected] About THE YEAR AHEAD Jerry Dentinger, Chicago 312-239-9191 / [email protected] General Partners Expect More Deal Flow, an Lee Duran, San Diego Easier Fundraising Environment & Improvements 858-431-3410 / [email protected] in Portfolio Company Performance Ryan Guthrie, Costa Mesa 714-668-7385 / [email protected] P rivate equity professionals entered Private Equity Study to take the pulse of Scott Hendon, Dallas into 2011 with high hopes for the year the industry and identify key issues that will 214-665-0750 / [email protected] ahead. In 2010, as economic conditions impact private equity in the year ahead. This Kevin Kaden, New York improved, general partners saw an uptick year’s study, which examined the opinions 212-885-7280 / [email protected] in deal flow, leverage return to the markets of more than 100 senior executives at Bob Pearlman, Atlanta and portfolio values increase. However, the private equity firms throughout the U.S., 404-979-7124 / [email protected] momentum seen during the first half of 2011 found that despite the continued challenges proved to be fragile. During the second half in the financing markets, private equity Matt Segal, Chicago 312-616-4630 / [email protected] of the year, private equity experienced a professionals are confident that the industry slowdown: the typical summer lull in activity is poised for recovery. With more than $400 extended well into the winter, as uncertainty billion in dry powder ready to invest and www.bdo.com/privateequity in Washington and Europe continued to 4,000 portfolio companies ready to sell, impact the global economy. fund managers are cautiously optimistic that 2012 will bring with it more deal flow, From October through December 2011, better portfolio company performance and the Private Equity Practice at BDO USA, an easier fundraising environment. LLP conducted its third annual PErspective  Read more
• 2.
  2 Executive Summary BDO PErspective Third Annual Private Equity Study  CONTINUED FROM PAGE 1 In fact, the majority of private equity fund managers (70 percent) – regardless of fund Approximately how many new deals did you close during the past 12 months size – expect to close two or three deals and how many do you predict you will close in the next 12 months? during the next 12 months. While that may not bring firms close to the level of deal flow 80% Next 12 Months 76% seen in “boom” years, it is an increase from Past 12 Months 2011 when nearly half (47 percent) of fund 60% managers reported closing no new deals and 50% another 19 percent reported closing only one new deal. Small funds – those with less than 48% 42% 40% $250 million in assets under management – were the hardest hit in 2011, with 66 percent reporting they closed no new deals during the 20% year. 4% 4% The moderate level of deal flow reported 1% 2% during the past year reflects the quality of 0-2 new deals 3-5 new deals 6-8 new deals 9+ new deals deals, which remained relatively consistent with the quality of deals seen in 2010. Nearly half (48 percent) of respondents reported Approximately how much capital did you invest through new deals and add-on the financial characteristics of the deals seen acquisitions during the past 12 months and how much do you predict you will invest in 2011 were only moderately better than during the next 12 months? those seen in 2010, while another 37 percent indicated the quality was the same as those Next 12 Months seen during the previous year. When asked the Past 12 Months 34% same question at the end of 2010, 21 percent of respondents indicated that the deals seen 27% during that year were much better than those 23% 22% seen in 2009, another 62 percent said they 20% were at least moderately better and only 14 16% percent indicated deal quality was the same in 10% 11% 10% 9% 2010 as in 2009. 5% 5% 5% 3% 1% 1% “Private equity fund managers are Less than $1M $11-$29M $30-$50M $51-$100M $101-$250M $251-$500M $501-$1B More than $1B approaching 2012 with cautious optimism. The last two quarters of 2011 proved to be slow for private equity, but general partners remain confident in u  nd Managers Look Fu previous 12 months. Middle market funds – their ability to source and close deals as those with $250 million to $500 million in to Invest More Capital in the economy turns around.” AUM – expect the most significant uptick with 2012 almost double the percentage of respondents – Lee Duran, partner and leader of the Private Despite fund managers’ cautious outlook (88 percent) predicting that they will invest Equity practice at BDO regarding deal flow, respondents to BDO’s $30 million or more during the next 12 Even so, the majority of respondents remain third annual study are hopeful that they months. That’s up from 45 percent who committed to their primary investment will deploy more capital in the coming year. reported investing the same amount during strategies. Only 7 percent have asked One fifth (22 percent) of private equity fund the trailing four quarters. their limited partners to allow them to managers – regardless of fund size – expect to change investment strategies to broaden deploy $30 million to $50 million of capital Looking back, the majority of private equity opportunities and only 11 percent stated they through new deals and add-on acquisitions funds (71 percent) directed the most capital will do so during the next 12 months. in the coming year and another 16 percent toward new deals in 2011. However, there expect to invest $51 million to $100 million. was an uptick in the number of funds That’s compared to only 10 percent and 11 reporting that they deployed the most capital percent of funds that reported investing toward add-on acquisitions (13 percent in the same amount, respectively, during the 2011 versus only 6 percent in 2010). When  Read more
• 3.
  Executive Summary BDOPErspective Third Annual Private Equity Study 3  CONTINUED FROM PAGE 2 asked about the year ahead, 95 percent of respondents indicated that they will seek add-on acquisitions, which is an increase from 88 percent of private equity funds that sought add-on acquisitions during the trailing four quarters. u  nds Increase Holding Fu Periods, Focus on Sales to Strategic Buyers At the same time that general partners are expecting more, but limited, deal flow in 2012, they are feeling pressure on the other end of the fund cycle as they look to exit their investments and earn a return for investors. While exit activity remained fairly steady from 2010 to 2011, BDO’s third annual study found that private equity professionals are not optimistic about their ability to exit deals in 2012. Despite the significant number of said they were receiving new commitments reallocating their assets away from alternative mature portfolio companies in the market, from LPs in 2010 and only 40 percent who investments” as the most significant challenge the majority of private equity fund managers said so in 2009. The largest percentage of they have faced. Another 22 percent and 12 (91 percent) indicated that their expected funds indicated that they are receiving the percent, respectively, identified “the quantity average holding period is longer now than it majority of first-time financial commitments of private equity funds raising new funds” and was 12 months ago. That’s up from 70 percent from family offices (55 percent), followed “past funds’ track record during the recession” who indicated the same in last year’s study. by pension funds (21 percent), international as the number one challenges. The largest percentage of respondents (31 investors (11 percent), endowment funds percent) indicated that their expected average (9 percent) and insurance companies (4 percent). u ortfolios Are in the P holding period is seven-12 months longer, with another 28 percent indicating it is 13-18 Black, but Individual months longer. However, an alarming one “The significant number of firms that Companies Continue to in five respondents (19 percent) indicated are either currently raising a new fund Face Hard Times that their expected average holding period is The majority (67 percent) of private equity currently more than two years longer than it or planning to do so in the coming professionals surveyed saw the overall value was at this time last year. year could lead to a marked uptick in of their entire current portfolio increase fundraising activity in 2012. However, it in 2011. That’s down slightly from 2010 When asked how their exit assumptions have won’t all be smooth sailing. The notable when 70 percent of respondents saw such changed when compared to 12 months ago, an increase. However, when it comes to 21 percent reported an increased focus on capital overhang of private equity funds individual portfolio companies, private equity sales to strategic buyers, 15 percent reported is likely to impact commitments in the fund managers reported that there are fewer an increased focus on a long-term hold and 7 coming year as investors look for funds’ underperforming companies within their percent reported an increased focus on sales cumulative distributions to increase.” portfolio now than one year ago. Twenty-one to financial buyers. Only 2 percent reported an percent of respondents indicated that “none” increased focus on IPOs. – Ryan Guthrie, managing director in the of their portfolio companies are performing Private Equity practice at BDO below forecasts or expectations, which is an u  ndraising Fu increase from 2010 when only 10 percent of While private equity professionals are not Despite the uptick in the number of fund respondents reported the same. That said, expecting an uptick in exit activity in the near managers receiving new commitments, many companies continue to struggle in the future, the majority are planning to raise new the majority of respondents acknowledged current economy with the largest percentage funds in 2012. More than three in five (63 that they are facing challenges in regards of respondents (22 percent) indicating that percent) respondents – regardless of fund to fundraising. When asked about the more than 20 percent of their portfolio size – indicated that they are receiving new current fundraising environment, the companies are currently performing below commitments from LPs. That’s up from 56 largest percentage of respondents (35 forecasts or expectations. percent of private equity professionals who percent) identified “institutional investors  Read more
• 4.
  4 Executive Summary BDO PErspective Third Annual Private Equity Study  CONTINUED FROM PAGE 3 “The stagnant global economy continues professional staff headcount and another 31 South and Central America Overtake Asia to impact funds’ ability to grow their percent reported increasing administrative as the Area with the Greatest Opportunity staff headcount at the operating company for New Investments portfolios. However, strategic fund level. At the fund level, 44 percent of The largest percentage of respondents (36 managers are taking steps now to respondents reported increasing employee percent) believe that, other than North mitigate losses and ensure they are count during the past 12 months and 42 America, South and Central America will well-positioned to maximize the return percent plan to do so during the next year. have the greatest opportunities for new on their investments as the market investments during the next 12 months, Other major findings from the BDO followed by Asia (27 percent). That’s a rebounds.” PErspective Private Equity Study switch from last year when 20 percent and – Scott Hendon, partner in the Private include: 59 percent saw opportunities in South and Equity practice at BDO Central America and Asia, respectively. Fund Managers Expect Leverage Ratios, Eighteen percent of respondents identified Cost of Capital to Rise Continental Europe as the area with the u  nds Continue Fu Of respondents who used leverage in their greatest opportunity for new investments, last deal, 39 percent indicated that 41 to 60 followed by the Middle East and Africa (15 to Mitigate Losses; percent of the deal value was debt. Looking percent) and Eastern Europe, including Russia Bankruptcies Decline at the debt ratio of their next deal, 48 (4 percent). In response, the majority of private equity percent expect 41 to 60 percent to be debt. professionals are taking steps to improve the Similarly, there was a drop in the percentage Manufacturing Attracts Investors, Followed bottom line at their portfolio companies, of respondents not planning to use debt at by Healthcare a trend that has been consistent during all in their next deal. While 18 percent of Private equity professionals continue to the past three years. Sixty-one percent of respondents indicated that they did not use see the greatest opportunities for new respondents to BDO’s third annual study have leverage in their last deal, only 9 percent are investments in the next 12 months in the reduced headcount at portfolio companies not planning to use leverage in their next manufacturing (28 percent) and healthcare performing below forecasts or expectations deal. When it comes to capital, the largest and biotech (21 percent) industries. However, during the past year; another 62 percent have percentage of respondents (45 percent) that’s down slightly from last year when reduced costs by scaling back, 72 percent expects the cost of capital to increase by up 37 percent and 23 percent of respondents have reassessed market strategy, 64 percent to 200 basis points during the next 12 months saw the greatest opportunities for new have renegotiated debt and 74 percent have given the recent discussions regarding the U.S. investments in manufacturing and healthcare monitored cash flow on a weekly basis. and global deficits. respectively. Thirteen percent of respondents Private equity professionals appear confident these efforts will continue to pay off. While 11 percent of respondents reported declaring bankruptcy for one or more portfolio companies during the past 12 months, only 3 Other than North America, during the next 12 months, which one of the percent expect to do so in the coming year. following geographic areas do you think will have the greatest opportunity for new investments? u  nds Report Hiring, Fu Continental Europe Increasing Headcount 15% 18% Eastern Europe, including Russia at Operating Company & South and Central America Fund level 4% Asia, including Southeast Asia At the same time, private equity fund managers seem to be hopeful that their Middle East and Africa portfolio companies will experience growth 27% during the coming year. For the second year in a row, the majority of private equity fund 36% managers (62 percent in 2011 and 63 percent in 2010) reported that they will increase professional staff headcount at the operating company level during the next 12 months. When asked about the past 12 months, 57 percent of respondents reported increasing  Read more
• 5.
  Executive Summary BDOPErspective Third Annual Private Equity Study 5  CONTINUED FROM PAGE 4 In which one of the following sectors did you see the greatest opportunities for new “Fund managers are increasingly investments during the past 12 months and in which sectors do you expect to see the focused on creating value by improving greatest opportunities during the next 12 months? operational efficiencies at their portfolio companies to ultimately generate Manufacturing 37% returns for their investors. Ensuring the 28% right management team is in place to Retail and Distribution 6% run the company is critical to driving 6% performance.” Technology 11% 10% – TIM MOHR, partner in the Private Equity practice at BDO Consulting Natural Resources, Energy 11% and other Commodities 13% Healthcare and Biotech 23% 21% Financial Services 9% 8% Media/Information 4% 5% Past 12 Months 0% Next 12 Months Other 9% expect the greatest opportunities to be in Eighteen percent reported their fund is not yet The BDO USA, LLP PErspective Private Equity natural resources and energy, followed by compliant, but in the process of implementing Study is a national survey conducted by PitchBook, technology (10 percent), financial services the new requirements using internal staff, an independent and impartial research firm dedicated to providing premium data, news and analysis to (9 percent) and retail and distribution (6 and another 17 percent indicated they are the private equity industry. More than 100 senior percent). Only 5 percent of respondents using an outside service provider. Nearly one executives at private equity firms throughout the believe there are opportunities in media/ in 10 (8 percent) indicated their fund is not at U.S. with $10 million to $72 billion in assets under management responded to BDO’s latest study, which information during the coming year. all compliant and they have not yet started was conducted from October through December 2011. implementing the new requirements. About BDO USA “The U.S. manufacturing industry worked Fund managers focus on strength of BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, to increase efficiencies and control management at new portfolio companies financial advisory and consulting services to a wide range of publicly traded and privately held companies. costs during the recession. As a result, The largest percentage of respondents (46 For more than 100 years, BDO has provided quality U.S. manufacturing companies are now percent) reported that they supplement the service through the active involvement of experienced existing management team at new portfolio and committed professionals. The firm serves clients well-positioned for growth, making it through more than 40 offices and more than 400 companies with new members and another 40 independent alliance firm locations nationwide. As an attractive industry for private equity percent said they either supplement or replace an independent Member Firm of BDO International investors in the coming year.” management, depending on the situation. A Limited, BDO serves multinational clients through a global network of 1,118 offices in 135 countries.   majority of respondents (74 percent) indicated – FRED ROZELLE, partner in the that, when they keep members of the existing BDO USA, LLP, a Delaware limited liability partnership, Manufacturing practice at BDO management team at a new portfolio is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the company, they always perform background international BDO network of independent member Funds work to comply with SEC regulations checks. firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more When thinking about the new SEC registration information, please visit: www.bdo.com.  requirements included in the Private Fund Material discussed is meant to provide general Investment Advisers Registration Act of 2010, information and should not be acted on without the largest percentage of fund managers professional advice tailored to your firm’s individual affected by the regulation (20 percent) needs. indicated their fund is fully compliant. © 2012 BDO USA, LLP. All rights reserved. www.bdo.com  Read more