The Pulse of Private Equity, Fall 2011 – Survey of Private Equity Executives

November 16, 2011

The Pulse of Private Equity - Fall 2011 

"An understanding of what lies around the corner for private equity is useful in anticipating trends and benchmarking a PE fund's activities with the market place. Since 2009, private equity executives have shared their views and outlook for the industry. We have found the resulting reports to be right on with their predictions." 

Michael Laveman
Partner, Financial Services
EisnerAmper LLP

With global economies addressing stability, stock markets behaving erratically, and the downgrading of U.S. debt, and the European banking crisis, the financial services segment couldn't help but be affected this year. In this third edition of The Pulse of Private Equity, EisnerAmper is providing the 2011 year-end and early 2012 outlook together with comparisons to the research for periods dating back to Q1 2009. This, together with third party data on historical trends in private equity, will provide readers with insight, knowledge and an outlook for the private equity market. The survey results continue to be a good indicator of the overall business of private equity—a business that has had significant change with compressed business cycles.

This survey explored various components of private equity as observed by PE executives. Unlike other surveys on private equity that review the industry from the PE executive's, perspective combined with service providers and consultants, The Pulse of Private Equity is singularly focused on the views of just the PE executives. This report explores key topics for private equity hence creating a snapshot of what lies just around the corner. The areas explored include:

  • Transactions and Exits
  • Employment
  • Portfolio Company Activities
  • Dry Powder
  • Sector Investment
  • Limited Partners
  • Debt Financing Availability
  • Time and Activities
  • EisnerAmper Observations

Transactions and Exits
In early 2011, the expectation for the full 1H 2011 closing of acquisitions anticipated the level to rise. However, the current survey respondents have seen a shift in this trend in mid-2011 and are now projecting the same or fewer closings for acquisitions. See Figure 3.

Figure 3: Expectations for Closing Acquisitions 

Expectations for Closing Acquisitions 

"This report confirms the slowdown in anticipated exits for the immediate future, but the early 2012 activity will be more telling if the downward trend continues or stabilizes." 

Joel Barth
Principal, Leader, Corporate Finance
EisnerAmper LLP

Sales or exits were not expected to significantly rise during the first half of 2011 and the PE executives surveyed projected activity to level off vs. their earlier optimism. Figure 4 presents their expectations for closing sales or exits. 40 percent of the executives surveyed see more sales or exits in the 2H 2011, this is not an improvement over their early 2011 outlook. Survey respondents changed their outlook for the availability of debt financing for transactions in the upcoming months with an unfavorable shift. See Figure 7.

Figure 4: Expectations for Closing Sales or Exits 

Expectations for Closing Sales or Exits 

In 2010, there was an increase in competitive bidding for new deals. The private equity executives surveyed have consistently reported reduced levels of competitive bidding activity. The market seems to have stabilized at a set level of competitive bidding. This is one of the trends with the least amount of variation over the past year and in the outlook. See Figure 5A. The competitive environment is not seen as significantly better, but the executives are anticipating some relief. See Figure 5B.

Figure 5A: Anticipated Competitive Bidding Activity: Acquisitions 

Anticipated Competitive Bidding Activity: Acquisitions  

Figure 5B: Anticipated Competitive Bidding Activity: Dispositions 

Anticipated Competitive Bidding Activity: Dispositions  

The majority of transactions continue to be with other private equity firms. Ninety-three percent of the respondents expected the same or more of their sales of holdings to be with other private equity firms and 86 percent of them expected the same amount or more of their new acquisitions to originate from other private equity firms. Figure 6 presents the respondents planned activities vs. earlier in 2011.

Figure 6: Types of Firms Involved with Transactions — 2H 2011 vs. 1H 2011 

Types of Firms Involved with Transactions — 2H 2011 vs. 1H 2011  

"It is a positive indicator to see the high percentage of exits anticipated to be with public companies. Most of the buying and selling activity has been with other private equity firms as it appears that the PE funds have been honing their investment strategies for portfolio growth and return." 

Christopher Loiacono
Partner, Co-Chair, Tax Advisory Services
EisnerAmper LLP

Debt Financing Availability
A significant drop in the availability of debt financing for transactions is expected for 2H 2011. See Figure 7. Compared to the beginning of 2011, only 35 percent anticipate an increased availability for the remainder of 2011 and beyond. With the weak financial markets, it's surprising that only 10 percent saw a decrease in debt financing availability. The projection for debt financing is not seen as improving for the short term.

Figure 7: Availability of Debt Financing 

Availability of Debt Financing  

Dry Powder
There was (and remains) a large amount of dry powder for buyouts. Dry powder is the committed but uncalled capital for buyouts which is estimated at approximately one-half trillion dollars. The total dry powder including buyouts plus distressed assets, real estate, venture, distressed private equity and mezzanine is estimated to be approximately one trillion dollars. The amount of dry powder at private equity firms continues to be vast and aging. Even with this deal anxiety, the transactions are not growing significantly. Earlier in the year, Bain & Company, Inc. reported in their Global Private Equity Report 2011 that the amount of capital available for investment across PE fund types is as follows:

Buyouts $434 billion ( Note: PitchBook reports the buyouts dry powder as $490B and Preqin reports this figure as $384B)
Real Estate $169 billion  
Venture Capital $152 billion  
Distressed Assets $53 billion  
Mezzanine Finance $42 billion  
Total: $850 billion  

"We asked the PE executives about how much of their dry powder they expected to put to work and only nine percent expect to put over 50 percent of it to work in 2012." 

Peter Cogan
Partner, Co-Chair, Financial Services
EisnerAmper LLP

When we asked the private equity executives how much capital from their most recent fund remained to be called, 53 percent of the respondents reported over 25 percent of the capital remained to be called. See Figure 8.

Figure 8: How Much Capital from Your Most Recent Fund Remains to be Called? 

How Much Capital from Your Most Recent Fund Remains to be Called?  

Only 14 percent of the respondents expected to put more than 50 percent of their dry powder to work in 2011, and only 9 percent expect to put more than 50 percent to work in 2012. See Figure 9.

Figure 9: How Much of this Dry Powder Do You Expect to Put to Work? 

How Much of this Dry Powder Do You Expect to Put to Work? 

PitchBook states that a third of private equity backed portfolio companies have been held by the same fund now for over five years. They identify 4,000 U.S. private equity portfolio companies older than three years and another 2,000 that are over five years old. These numbers are very high for a traditionally turnover-based industry. This affects limited partners' interest in further investments and has caused the funds to be creative in seeking liquidity events.

"There's work to be done at PE firms, especially with the complexity of their funds and portfolio companies increasing. The employment outlook supports this. Investments in human capital to improve asset performance is a key strategy for private equity firms." 

James Hatch
Partner-in-Charge, Human Capital, Advisory Services
EisnerAmper LLP

The employment projections by the respondents for 2H 2011 showed a significant increase vs. the projections provided in our earlier 2011 report. See Figure 10. At just a few funds, there continues to be some pressure toward staff reduction significantly offset by a meaningful 37 percent of private equity respondents planning to increase their staffing and 60 percent keeping the staffing the same.

Figure 10: Employment Projections 

Employment Projections  

Respondents were asked about the type of professionals they have been hiring and plan to hire. See Figure 11. While research/analysis and financial new hires continue to top the hiring list for private equity, 37 percent of new hires are experts in operations and compliance.

Figure 11: Types of Professionals Hired in 2011 

Types of Professionals Hired in 2011  

"Whether Life Sciences or B-to-B, the need for industry experience for PE funds has become more important. The expertise needed by industry sector varies and operational and sector-specific skills will enhance a portfolio company's performance." 

Maureen Blair
Partner, Financial Services
EisnerAmper LLP

Sector Investment
The survey respondents identified target segments that are of the most interest for investment in 2011. See Figure 12. The interest continues to be highest in relatively stable and safe industries including business services and other B2B, healthcare and manufacturing and distribution. The ranking by private equity executives for their target sectors for investment in 2012 mirrored the list for 2011 with the exact same ranking. However, the percent of respondents interested in these sectors went down for every industry.

Figure 12: Target Sectors for Investment* 

Target Sectors for Investment 

The PitchBook Annual Private Equity Breakdown 2011 cites the percent of deals by industry for Q1 2011 and Q2 2011 as outlined in Figure 13.

Figure 13: Private Equity Deals by Industry 

Private Equity Deals by Industry  

"Capital market activity has slowed with historical PE deals showing no significant change. While the dry powder is there, PE funds continue to carefully invest and divest to maximize returns. Looking back to 2006, the decline in the number of private equity deals has taken this industry from over 600 deals per quarter to under 400. From 2008 through this year, the number of deals remains around 400 per quarter. This is the norm without a significant change in sight." 

Howard Cohen
EisnerAmper LLP

The history of private equity deal flow shows the downward trend since 2006 with a positive diversion in 2007. While the end of 2010 presented a change in this trend with a strong fourth quarter, PitchBook reports so far this year a reversal in this increase as the decline continues.

Figure 14: Total Number of Private Equity Deals 

Total Number of Private Equity Deals 

Time and Activities
Since 2009, The Pulse of Private Equity has been exploring the amount of time that private equity fund professionals spend on fund activities. Figure 15 reviews their activity concentrations from 2009 through 2011. The trend consistently shows a ramp-up in the amount of time for each fund's team activities.

"Operating companies are addressing risk areas carefully with the need to proactively assess key concerns such as compliance, IT, SOX, Dodd-Frank and internal audit." 

James Mack
Partner, Consulting Services
EisnerAmper LLP

For the first time since Ql 2009, the private equity executives have reduced their team's time projections for "looking for or working on new transactions." The absolute percentage is still relatively high vs. other areas surveyed, but they have shifted resources to the other areas noted in Figure 15. Of particular note, is the return to a higher amount of attention paid to seeking exits.

Figure 15: 2009 - 2011: How Much Time Do You Expect Your PE Team to Spend on These Activities? 

2009 - 2011: How Much Time Do You Expect Your PE Team to Spend on These Activities? 

Portfolio Company Activities
We asked private equity executives to comment further on the types of activities their team is most involved within their portfolio companies' operations.

Figure 16: In Which Areas Are You Most Involved with Your Portfolio Companies? 

% of Respondents
Strategic Planning 24%
Financial Management 18%
Revenue Growth/Sales/Marketing/Business Development 15%
Human Capital 11%
Operations Management/Improvement 10%
Board of Directors 9%
Exit Strategies 4%
Fundraising 4%
Other 5%
*Some respondents provided numerous responses.


The largest area of involvement of the respondents with the companies was strategic planning which included activities such as alliances, mergers and acquisitions, planning and development, and new business opportunities. Strategic planning goes hand in hand with revenue growth/sales/marketing/business development, which was 15 percent of responses. As expected, financial management was identified as a focus area, however, surprisingly it was only identified by 18 percent of responses. Human capital ranked with 11 percent of the responses and included areas such as people management, hiring and firing, staff development, team building and mentoring, KPI analysis, building bench strength/succession, and strategic partnership. 10 percent of the respondents identified operations management/improvement, which included operations management, operations support, turnaround situations; and with their portfolio companies, performance tracking. Less time was spent by executives on the more fund-faced topics such as exit strategies and fundraising. (Exit strategies included positioning for sale, exit analysis, and liquidation planning.)

"The responsibilities of the CEO at a portfolio company span business development through exit strategy; and the teamwork of PE executives with the CEO, and other portfolio company management, has become a critical success factor. The time a CEO has with a portfolio company has increased significantly with the increase in the time in a fund's portfolio. Skills and the CEO's relationship with the GP are paramount." 

Alan Wink
Director, Capital Markets
EisnerAmper LLP

Fundraising activity has remained relatively unchanged since 2009. See Figure 17. With the cautionary stance for new investments by limited partners, the success rate for fundraising has not improved over this period. There are periodic improvements, but nothing sustainable as of yet.

Figure 17: Quarterly Fundraising Q1 2007 - Q2 2011 

Quarterly Fundraising Q1 2007 - Q2 2011  

"Fundraising has not yet rebounded and there is little expectation of it returning to pre-2008 levels, anytime soon." 

Jay Weinstein
Partner-In-Charge, Philadelphia
EisnerAmper LLP

According to Preqin Private Equity Quarterly, Q2 2011, fundraising for Q2 vs. Q1 2011 showed mixed activity. See Figure 18. Buyout funds raised $15.3B in Q2 2011 which is an increase of nine percent. Venture funds raised 42 percent less in Q2 versus Q1. In the October 2011 issue of Mergers & Acquisitions, it was noted that globally over 500 funds are trying to raise capital.

Figure 18: Fundraising Q2 vs. Q1 2011 

Fundraising Q2 vs. Q1 2011  

Limited Partners
Private equity executives were asked to give their view on the importance their limited partners placed on fund operations which is summarized in Figure 19.

Figure 19: PE Executives View on LPs' Areas of Interest 

  Rated as Moderate to High Level 
  Q1 2009*  Q1 2010  Q1 2011  1H 2011  2H 2011 
Due diligence related to the
69% 84% 89% 91% 87%
Due diligence process related
to the investments
67% 74% 78% 83% 85%
Management and incentive
fees and other expenses
59% 75% 79% 79% 87%
Other fund terms
(e.g., lockups, commitments)
55% 62% 64% 67% 82%
Fair value investment valuation
56% 53% 59% 62% 74%
*Per respondents of EisnerAmper The Pulse of Private Equity Survey 2010

"The importance of transparency across many industries and disciplines has been an important topic. For private equity and other alternative investment funds, transparency is an essential topic to address and to master." 

Charles Weinstein
EisnerAmper LLP

The PE executives who participate in the Pulse of Private Equity survey have shown an increase in their view of the LPs' concern for due diligence, fund terms, management fees and fair value. Figure 19 shows the increase in their perception of LPs' concerns in most areas noted from 2009 through the end of 2011. In particular, they have identified a significant uptick in the concern about:

  • Management and incentive fees, and other expenses
  • Other fund terms (e.g., lockups, commitments)
  • Fair value investment valuation process

The increase in these areas ranged from 10 to 22 percent for the 2H 2011 vs. the 1H 2011 outlook, with the largest jump in "Other Fund Terms" with a 22 percent increase in the number of respondents. LPs have been scrutinizing terms, fees and expenses in the current economic environment to address their appetite for returns.

Fall 2011

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