According to BDO, ninety-five percent of firms surveyed plan to close five deals or less within the coming year, a slightly higher projection than last year’s survey, when 87 percent of respondents said they would close no more than five deals. Overall, the study found that firms are largely planning to replicate 2015 investment levels and priorities in 2016 as they wait out current economic fluctuations. Investment levels are also slightly more conservative, with 93 percent of managers expecting to invest $250 million or less in the coming year, up from 88 percent in 2015.
Private equity firms also believe the challenges they faced in 2015 will hold steady in the coming year. As in BDO’s 2015 study, pricing remains the top challenge and was cited by over a third of those surveyed. At the same time, 64 percent of fund managers cite gaps between buyer and seller pricing expectations as their top obstacle when it comes to closing deals, up from 48 percent in 2015.
“After the successes private equity experienced in 2014, market unevenness and a sluggish deal landscape led to a plateau in 2015. As we kick off 2016, fund managers are being prudent about deploying their dry powder as they wait to see how the economy continues to recover and consider industry shake-out of weaker players,” said Lee Duran, partner and private equity practice leader at BDO.
Despite fund managers’ conservative 2016 planning, 70 percent of respondents still feel optimistic about the investment environment for the year ahead, up from just over half of respondents (56 percent) in 2015.
Fund managers cite the technology (65 percent) and healthcare/biotech (63 percent) sectors as the industries most likely to experience rising valuations in 2016 and this is consistent with their sentiments in 2015. Conversely, 59 percent of those surveyed see retail & distribution as the most likely sector to see declining valuations this year.
“While private equity interest in some healthcare segments, such as hospital and inpatient services, has been tempered up to this point, funds continue to be active in specialty areas such as behavioral health, dermatology and pain management, where they can leverage their operational expertise through a buy-and-build strategy and scale,” said Patrick Pilch, managing director and healthcare advisory practice leader at BDO.
For the manufacturing sector, close to one-third of those surveyed said the sector will generate the greatest opportunity for investment in the next 12 months. Though the manufacturing sector in the US has suffered from lagging exports due to a strong dollar and weak demand for durable goods, investors see opportunity as a result of the low cost of energy in the US.
“Manufacturers are taking advantage of current conditions to set themselves up for future success,” said Dan Shea, managing director with BDO Capital Advisors and a member of BDO’s private equity practice. “The US has a sustainable energy cost advantage thereby making manufacturers more competitive globally. As a result, the appeal of the manufacturing industry for private equity investment may continue for years to come.”
The number of firms saying they plan to pursue more cross-border deals has grown this year, suggesting that some funds may be increasingly willing to expand their geographic focus in order to find good deals. However, they are still in the minority of respondents, with 65 percent of fund managers not anticipating any additional international activity in the coming year. The challenges funds face in pursuing international activity, however, remain largely the same as 2015.Fund managers point to local resources (31 percent), cultural nuances (30 percent) and regulations impacting cross-border acquisitions (23 percent) as the top challenges for international transactions.
The 7th annual BDO PErspective Private Equity Study was conducted from October through December 2015 and surveyed 140 senior executives at private equity firms throughout the United States and Western Europe. The survey was conducted by BDO in partnership with PitchBook.
BDO’s private equity practice assists private equity funds, portfolios, venture capital, mezzanine, and buyout firms throughout the fund cycle with all aspects of fund services, portfolio management and compliance, transaction advisory services and exit services. BDO is a professional services firm providing assurance, tax, financial advisory and consulting services to a range of publicly traded and privately held companies. The firm serves clients through 63 offices and more than 450 independent alliance firm locations nationwide (www.bdo.com).
© 2016 Private Equity Professional • 2-9-16