BDO Private Equity Study 2012


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BDO Private Equity Study 2012

  1. 1. Spring 2012 www.bdo.comExecutive 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 / scacurak@bdo.comPrivate Equity Professionals Alfred Cepero, Miami 305-381-8000 / acepero@bdo.comExpress Cautious Optimism Wayne Corini, Washington, D.C. 301-634-4910 / wcorini@bdo.comAbout THE YEAR AHEAD Jerry Dentinger, Chicago 312-239-9191 / jdentinger@bdo.comGeneral Partners Expect More Deal Flow, an Lee Duran, San DiegoEasier Fundraising Environment & Improvements 858-431-3410 / lduran@bdo.comin Portfolio Company Performance Ryan Guthrie, Costa Mesa 714-668-7385 / rguthrie@bdo.comP 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 / ahead. In 2010, as economic conditions impact private equity in the year ahead. This Kevin Kaden, New Yorkimproved, general partners saw an uptick year’s study, which examined the opinions 212-885-7280 / kkaden@bdo.comin deal flow, leverage return to the markets of more than 100 senior executives at Bob Pearlman, Atlantaand portfolio values increase. However, the private equity firms throughout the U.S., 404-979-7124 / bpearlman@bdo.commomentum seen during the first half of 2011 found that despite the continued challengesproved to be fragile. During the second half in the financing markets, private equity Matt Segal, Chicago 312-616-4630 / msegal@bdo.comof the year, private equity experienced a professionals are confident that the industryslowdown: the typical summer lull in activity is poised for recovery. With more than $400extended well into the winter, as uncertainty billion in dry powder ready to invest and 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 andthe Private Equity Practice at BDO USA, an easier fundraising environment.LLP conducted its third annual PErspective  Read more
  2. 2. 2 Executive Summary BDO PErspective Third Annual Private Equity Study CONTINUED FROM PAGE 1In fact, the majority of private equity fundmanagers (70 percent) – regardless of fund Approximately how many new deals did you close during the past 12 monthssize – 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 maynot 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 Months2011 when nearly half (47 percent) of fund 60%managers reported closing no new deals and 50%another 19 percent reported closing only onenew deal. Small funds – those with less than 48% 42% 40%$250 million in assets under management –were the hardest hit in 2011, with 66 percentreporting 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 dealsdeals, which remained relatively consistentwith the quality of deals seen in 2010. Nearlyhalf (48 percent) of respondents reported Approximately how much capital did you invest through new deals and add-onthe financial characteristics of the deals seen acquisitions during the past 12 months and how much do you predict you will investin 2011 were only moderately better than during the next 12 months?those seen in 2010, while another 37 percentindicated the quality was the same as those Next 12 Monthsseen during the previous year. When asked the Past 12 Months 34%same question at the end of 2010, 21 percentof 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 $1Bapproaching 2012 with cautiousoptimism. The last two quarters of 2011proved to be slow for private equity, butgeneral 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 inthe 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 investEquity practice at BDO regarding deal flow, respondents to BDO’s $30 million or more during the next 12Even so, the majority of respondents remain third annual study are hopeful that they months. That’s up from 45 percent whocommitted to their primary investment will deploy more capital in the coming year. reported investing the same amount duringstrategies. 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 tochange investment strategies to broaden deploy $30 million to $50 million of capital Looking back, the majority of private equityopportunities and only 11 percent stated they through new deals and add-on acquisitions funds (71 percent) directed the most capitalwill 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. 3. Executive Summary BDO PErspective Third Annual Private Equity Study 3 CONTINUED FROM PAGE 2asked about the year ahead, 95 percent ofrespondents indicated that they will seekadd-on acquisitions, which is an increase from88 percent of private equity funds that soughtadd-on acquisitions during the trailing fourquarters.u  nds Increase Holding FuPeriods, Focus on Salesto Strategic BuyersAt the same time that general partners areexpecting more, but limited, deal flow in2012, they are feeling pressure on the otherend of the fund cycle as they look to exit theirinvestments and earn a return for investors.While exit activity remained fairly steadyfrom 2010 to 2011, BDO’s third annual studyfound that private equity professionals arenot optimistic about their ability to exit dealsin 2012. Despite the significant number of said they were receiving new commitments reallocating their assets away from alternativemature portfolio companies in the market, from LPs in 2010 and only 40 percent who investments” as the most significant challengethe 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 quantityaverage holding period is longer now than it majority of first-time financial commitments of private equity funds raising new funds” andwas 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 fundspercent) indicated that their expected average (9 percent) and insurance companies (4 percent). u ortfolios Are in the Pholding period is seven-12 months longer,with another 28 percent indicating it is 13-18 Black, but Individualmonths longer. However, an alarming one “The significant number of firms that Companies Continue toin five respondents (19 percent) indicated are either currently raising a new fund Face Hard Timesthat their expected average holding period is The majority (67 percent) of private equitycurrently more than two years longer than it or planning to do so in the coming professionals surveyed saw the overall valuewas 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 2010When asked how their exit assumptions have won’t all be smooth sailing. The notable when 70 percent of respondents saw suchchanged when compared to 12 months ago, an increase. However, when it comes to21 percent reported an increased focus on capital overhang of private equity funds individual portfolio companies, private equitysales to strategic buyers, 15 percent reported is likely to impact commitments in the fund managers reported that there are feweran increased focus on a long-term hold and 7 coming year as investors look for funds’ underperforming companies within theirpercent reported an increased focus on sales cumulative distributions to increase.” portfolio now than one year ago. Twenty-oneto 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 anu  ndraising Fu increase from 2010 when only 10 percent ofWhile 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 thefuture, the majority are planning to raise new the majority of respondents acknowledged current economy with the largest percentagefunds in 2012. More than three in five (63 that they are facing challenges in regards of respondents (22 percent) indicating thatpercent) respondents – regardless of fund to fundraising. When asked about the more than 20 percent of their portfoliosize – indicated that they are receiving new current fundraising environment, the companies are currently performing belowcommitments 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. 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 Asiato 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 Investmentsportfolios. However, strategic fund level. At the fund level, 44 percent of The largest percentage of respondents (36managers are taking steps now to respondents reported increasing employee percent) believe that, other than Northmitigate losses and ensure they are count during the past 12 months and 42 America, South and Central America willwell-positioned to maximize the return percent plan to do so during the next year. have the greatest opportunities for newon their investments as the market investments during the next 12 months, Other major findings from the BDO followed by Asia (27 percent). That’s arebounds.” 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 andEquity 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 theu  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 (15to Mitigate Losses; percent of the deal value was debt. Looking percent) and Eastern Europe, including RussiaBankruptcies 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, Followedbottom line at their portfolio companies, of respondents not planning to use debt at by Healthcarea trend that has been consistent during all in their next deal. While 18 percent of Private equity professionals continue tothe past three years. Sixty-one percent of respondents indicated that they did not use see the greatest opportunities for newrespondents to BDO’s third annual study have leverage in their last deal, only 9 percent are investments in the next 12 months in thereduced headcount at portfolio companies not planning to use leverage in their next manufacturing (28 percent) and healthcareperforming 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 whenreduced costs by scaling back, 72 percent expects the cost of capital to increase by up 37 percent and 23 percent of respondentshave reassessed market strategy, 64 percent to 200 basis points during the next 12 months saw the greatest opportunities for newhave renegotiated debt and 74 percent have given the recent discussions regarding the U.S. investments in manufacturing and healthcaremonitored cash flow on a weekly basis. and global deficits. respectively. Thirteen percent of respondentsPrivate equity professionals appear confidentthese efforts will continue to pay off. While11 percent of respondents reported declaringbankruptcy for one or more portfoliocompanies during the past 12 months, only 3 Other than North America, during the next 12 months, which one of thepercent 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 EuropeIncreasing Headcount 15% 18% Eastern Europe, including Russiaat Operating Company & South and Central AmericaFund level 4% Asia, including Southeast AsiaAt the same time, private equity fundmanagers seem to be hopeful that their Middle East and Africaportfolio companies will experience growth 27%during the coming year. For the second yearin a row, the majority of private equity fund 36%managers (62 percent in 2011 and 63 percentin 2010) reported that they will increaseprofessional staff headcount at the operatingcompany level during the next 12 months.When asked about the past 12 months, 57percent of respondents reported increasing  Read more
  5. 5. Executive Summary BDO PErspective 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 Equitynatural 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 seniorpercent). Only 5 percent of respondents using an outside service provider. Nearly one executives at private equity firms throughout thebelieve 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, whichinformation 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 qualityU.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 clientswell-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. Asan attractive industry for private equity percent said they either supplement or replace an independent Member Firm of BDO Internationalinvestors 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 memberFunds 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 moreWhen thinking about the new SEC registration information, please visit: requirements included in the Private Fund Material discussed is meant to provide generalInvestment Advisers Registration Act of 2010, information and should not be acted on withoutthe largest percentage of fund managers professional advice tailored to your firm’s individualaffected by the regulation (20 percent) needs.indicated their fund is fully compliant. © 2012 BDO USA, LLP. All rights reserved.  Read more