Private Equity houses shy away from new deals, focus on growing
portfolio companies
The vast majority of private equity firms will be doing fewer
deals for less money over the coming 12 months, as the industry
reveals its most pessimistic transaction outlook in at least five
years, according to the latest Grant Thornton Private Equity
Barometer.
In the quarterly survey of 100 private equity executives, 85 per
cent predicted deal values would fall over the coming year, up from
just 13 per cent who foresaw deal values falling at the same time
last year, and 69 per cent in Q1 2008.
The number of deals being completed in the coming 12 months was
also predicted to fall, with 64 per cent of PE houses foreseeing a
drop, compared with just 10 per cent in Q2 2007, and 33 per cent
last quarter.
It is the most pessimistic deal sentiment expressed by the
industry since the survey began in 2003.
David Ascott, Head of Private Equity at Grant Thornton, said
'wait and see' was now the order of the day, as private equity
firms held tight for better economic conditions, in order to exit
with returns approaching those envisioned when investing
initially.
"The stubbornly cautious sentiment in the market reflects the
fact that there have been many PE deals caught out due to the
credit crunch and rapidly changing economic situation, as business
values have dropped and certain sectors face an tumultuous short
term outlook.
"Now that we are beginning to see a significant adjustment,
private equity houses may now look to acquire at lower multiples,
while still targeting risk-adjusted returns. But it is the
companies that were bought just before the credit crunch started to
bite that are most likely to be causing some pain. These are the
deals forcing the lack of movement," Ascott continued.
However, the news was better for private equity-owned companies,
as 84 per cent of PE executives expect their own portfolio
companies to grow in the coming 12 months, including 37 per cent
that foresee major growth.
Those working for private equity owned companies can also breath
a sigh of relief, with just two per cent surveyed planning to make
portfolio company redundancies. In fact 59 per cent actively
planned to increase staff levels.
"Most private equity firms have the ability to take a longer
term view, offering the ability to consolidate business portfolios
and focus on fundamentals rather than having to push through the
sale of a company in a given timeframe. It is hard to make the
charge of asset strippers stick when you consider the long term
position most PE houses are now taking."
Caution is set to last for some time yet, with the majority of
executives now expecting the effects of the credit crunch to
continue for at least another year; 60 per cent said the crunch
would last another 12 - 24 months, while 9 per cent expected it to
last even longer.
The sector set for the most interest from private equity over
the next 12 months is business services, particularly facilities
management, with 55 per cent of executives surveyed saying they
would be likely invest in this area. Second was perennial favourite
healthcare, with 39 per cent of PE executives looking at
opportunities in the sector, followed by financial services with
interest from 21 per cent of PE houses.