Private Equity Executives Remain Confident in the Number of Deal Opportunities Over the Next 12 Months

May 14, 2012 /

Senior executives of private equity (PE) firms are maintaining a cautious but optimistic outlook on the state of the economy, both locally and globally, according to the results of the latest Ernst & Young Capital Confidence Barometer.

Nearly half (48%) of the 150 PE investors surveyed globally were optimistic about the number of deal opportunities in 2012. Fewer than 6% remain pessimistic, down from 11% six months ago. This is matched by the overall corporate sentiment in the barometer. Globally, 31% of the 1,500 respondents indicated a likelihood to divest in the next 12 months. Forty-four percent of large companies – those with revenues of US$5b or higher – indicated their interest in making acquisitions in the same time period.

The availability of credit has become an important concern to PE investors, particularly as developments in the Eurozone have unfolded. Globally, more than 70% of survey respondents described their level of confidence as “positive” or “stable.” In North America, 9 out of 10 respondents viewed credit availability the same way.

Jeff Bunder, Global Private Equity Leader at Ernst & Young comments: “Corporate M&A activity is an important component of a healthy PE environment. The increase in divestitures on the part of corporates is a welcome sign for PE buyers and is an indication that asset pricing has stabilized. Additionally, there is growing confidence in the availability of credit, a key component to PE deal-making.”

However, the general sentiment is that the quality of deal opportunities has fallen slightly since mid-2011. While 47% of PE respondents in the previous survey described their confidence in the quality of deal opportunities as “positive” or “very positive,” that number has fallen to 37.5%, with an increase in respondents holding a negative outlook (from 11% to 13%). This demonstrates that the deal market remains choppy as there appears to be a lack of consistency in the volume of acquisition candidates.

Forty-nine percent of PE respondents characterized global economic conditions as “improving”, compared with just 20% six months ago. The view of an improving global economy is likely contributing to the expectations of PE investors when it comes to pricing for M&A assets — more than 43% of respondents said that pricing and valuation will increase over the next year, up from 30% in October. Forty-four percent of respondents predicted that M&A assets will not change fundamentally in price. These numbers have shifted since October 2011, when 58% of respondents said that asset pricing would remain at current levels.

PE firms based in the Asia-Pacific region and in North America were more optimistic about their local economies, while respondents based in Western Europe were less optimistic and viewed the economy as “modestly declining.”

Bunder continues: “The Eurozone crisis has had an impact on many of the PE firms that invest in the region. Since credit quality for sovereigns and corporations first began to deteriorate on a widespread basis a few years ago, the crisis has influenced securities, valuations, credit, counterparty risk and the currencies used to support short-and long-term financial instruments. Fund-raising pressure and credit availability have also become major concerns.”

Portfolio company profitability and fundraising come under pressure
Only 8% of respondents agreed with the statement that the Eurozone crisis has not affected their business – none of these respondents were in Western Europe. Compared to their peers in North America and Asia, European respondents indicated even more pressure in the areas of fund-raising (57%), credit availability (50%), and profitability in the portfolio (43%). Increased regulation and taxation were identified far less often by Western European respondents than they were by PE investors in North America and Asia-Pacific region.

PE firms increase stress testing, working capital and opportunistic M&A
The Eurozone crisis has created new opportunities as well as challenges for PE investors. On the investment side, one in four respondents identified opportunistic M&A as a leading area of interest. The survey also found that 26% of PE firms indicated increasing their focus on working capital and cash management to avoid facing a liquidity crunch in light of the crisis.

“While central banking authorities in Europe have addressed the short-term liquidity issues through measures such as emergency lending and new regulations, individual portfolio companies could still face adverse consequences from future changes in this region,” explains Bunder.”

Investors look to increase activity in emerging markets, particularly Asia
The high rate of economic growth experienced by emerging markets in the last year few years, particularly in Asia, continues to draw strong interest from PE investors. Eighty-seven percent of the respondents identified “emerging Asia” as a destination for increased acquisition activity over the next 12 months. India ranked second with 80% planning to increase activity there and China scored third with 77% as the most popular choice. Africa and Latin America (including Brazil) complete the list of top five leading emerging market destinations for PE investment.

PE interest in “frontier” markets, such as Turkey, Russia/CIS, and Africa saw large increases in respondents who indicated they were poised to deploy greater amounts of capital in these regions.

Bunder concludes, “PE investors remain cautious about the current economic market. However, the continued unsettled environment has honed the industry’s value creation strategies and its ability to time exits to match upswings in the economy. PE firms will continue to actively seek acquisition and exit opportunities – in home markets and abroad.


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