Pulse of Private Equity - Research Results - Fall 2011
Private Equity Executives forecast limited growth in second half 2011 transaction flow and stagnant level of fundraising according to latest Pulse of Private Equity Research Report released by EisnerAmper
Fund Managers See Less Debt Financing Available. Trend Toward PE Focus on Portfolio Company Operations Continues. See an Increase in Employment.
EisnerAmper today announced the release of the third edition of The Pulse of Private Equity, its biannual research report based on survey results from private equity fund executives. The results show that private equity firms see a leveling off in terms of transactional activity as YE 2011 approaches, with a stagnant outlook on fund raising. Respondents from the previous report in May saw the availability of debt financing increasing but in the current report they project status quo or even some cooling down. In fact only 35 percent anticipate increased debt financing availability for the remainder of 2011.
More than 100 fund managers in the United States, with a large concentration along the Northeast corridor, responded to the survey which measured fund activity, debt availability, employment and portfolio fund performance, among other items.
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The employment projections at funds for 2H 2011 project a significant increase in hiring compared to May of this year, with 37 percent stating they will increase staff levels. In a continuing trend fund managers again are paying increased attention to hiring operational expertise to assist with portfolio company management. Sector investments also mirrored the May results with a preference for investments in stable industries such as business services and other B2B. The survey also measured the time spent by fund teams on certain activities and - for the first time since Q1 2009 - found that private equity executives have reduced their team’s time looking for or working on new transactions. Areas where PE teams are most involved with their portfolio companies include strategic planning, financial management, revenue growth/sales and business development, human capital and operations improvement.
The concerns that fund executives have with respect to limited partners remain significant. They rate their perception of the LP’s interest in due diligence as very high, especially as related to the manager (87 percent) and investments (85 percent). Three other areas of concern showed marked increases, between 1H 2011 and 2H 2011, in levels of LP interest: Management Incentives, Fees and Expenses (up from 79 percent to 87 percent); Fund Terms such as Lock-ups (up from 67 percent to 82 percent), and Fair Value Investment Valuation Process (up from 62 percent to 74 percent).
The survey inquired about the level of dry powder which is now estimated to total approximately $1 trillion. In reviewing the data with regard to the vast and aging amount of dry capital at private equity firms, Peter Cogan Partner and Co-Chair of the EisnerAmper Financial Services practice said, “We asked PE executives about how much of their dry powder they expected to put to work and only nine percent expect to put more than 50 percent of it to work in 2012.”
A number of observations can be drawn from the results. Howard Cohen, Partner and Chairman of EisnerAmper LLP, cites several: “Compressed business cycles are now common with cycles of good and poor performance in fund raising debt financing and deal flow occurring faster.” Portfolio companies are also undergoing significant business process re-engineering with strategic and operational planning now an important part of the daily activities of fund managers. Cohen also echoes the survey’s findings regarding the concept of the new norm. “What worked yesterday may not work tomorrow. Investments are being held longer, so, it is important to stay abreast of industry trends, government regulations and the demands of compliance, tax changes and market volatility.”