The Pulse of Private Equity, Spring 2011 – Survey of Private Equity Executives
The Pulse of Private Equity - Spring 2011
"A change in the business of private equity has occurred. The current positive trends, while encouraging, do not indicate any return to the characteristics of the private equity industry of past years. The 'new' private equity business is founded in closer relationships for all parties involved. The LP and GP are more connected as are the fund and the portfolio companies. Optimizing these tighter relationships is essential to maximize value creation."
The Pulse of Private Equity reported EisnerAmper's first survey results from mid-2010 with observations on the changing private equity market. At that time, sellers were unwilling to part with their assets at the less than desirable multiples that were being offered. That was compounded with the limited availability of debt financing which had slowed most private equity activity. There was (and remains) a large amount of dry powder for buyouts, i.e., the committed but uncalled capital is cited at approximately one-half trillion dollars. The total dry powder including buyouts, distressed assets, real estate, venture, distressed private equity and mezzanine is estimated to be approximately one trillion dollars. EisnerAmper survey results at that time presented an uptick in the business for transactions and debt availability as well as other indicators.
In this second survey, EisnerAmper asked private equity executives a variety of questions about their view of their firm's fund activity. Once again, their insights are consistent with market trends and importantly we saw a continuity in the trends that the private equity executives identified in mid-2010. 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
- Limited Partners
- Dry Powder
- Sector Investment
- EisnerAmper Observations
- Debt Financing Availability
- Time and Activities
Transactions and Exits
The expectation for the full 1H 2011 closing of acquisitions anticipates the level to rise as summer approaches. The closing activity from December 2010 through March 2011 was seen as consistent with the earlier part of 2010. The executives are projecting a pickup in the next few months for closing acquisitions. See Figure 3.
Figure 3: Expectations for Closing Acquisitions
"The deal environment remains highly competitive, but with some signs of easing. The amount of deal-making with other private equity and venture capital funds continues to rise as each fund looks to optimize its strategy and longer term focus areas."
Sales or dispositions are not expected to significantly rise as the first half of 2011 concludes. Private equity executives continue to expect more acquisition activity than sales activities. Figure 4 presents their expectations for closing sales or dispositions with only a small increase to 41 percent of the executives surveyed who see more sales or dispositions in this period versus 55 percent who expect more acquisitions in this same period. Survey respondents expect the additional availability of debt financing for transactions in the upcoming months to further open up exit opportunities (See Figure 7).
In 2010, there was an increase in the competitive bidding for new deals. The private equity executives surveyed see this easing somewhat as the first half of 2011 winds down. The competitive environment is not seen as significantly better, but the executives are anticipating some relief (See Figure 5).
Figure 4: Expectations for Closing Sales or Dispositions
Figure 5: Competitive Bidding Activity
Figure 6: Percent of Respondents Who Noted More Transactions with Identified Types of Firms for 1H 2011 vs. Q1 2010
60 percent of respondents expect more of their transactions to be with other private equity and venture capital firms in the first half of 2011 versus Q1 2010. Of interest is the private equity respondents' targeting of public companies (and IPOs) for their disposition of portfolio companies. Preqin, an alternative assets research firm, cites 17 percent of private-equity backed exits in 2010 coming from IPOs versus only 5 percent in 2008. Figure 6 shows the respondents' current and expected acquisition and sales activities with target firms categories.
All sources confirm the amount of dry powder at private equity firms to be very large and that the firms are anxious to implement deals. 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 Real Estate $169 billion Venture Capital $152 billion Distressed Assets $53 billion Mezzanine Finance $42 billion --------------- Total $850 billion
On all accounts the numbers are staggering, and it will take quite some time to put this funding to use. We asked the private equity executives how much capital from their most recent fund remained to be called. 60 percent of the respondents reported over 25 percent of the capital remained to be called. Only 20 percent of the respondents expected to put 50 percent or more of their dry powder to work in 2011, leaving much of it on the side for the rest of 2012.
Debt Financing Availability
The respondents see the availability of debt financing for transactions continuing to increase. (See Figure 7.) Compared to Q1 2010, 67 percent saw an increase during December 2010 through March 2011 and 83 percent anticipate an increased availability for the remainder of the first half of 2011 and beyond. This positive trend is not news but yet another confirmation of the availability of an essential lever for the private equity industry.
Figure 7: Availability of Debt Financing
Figure 8: Employment Projections
The employment projections by the respondents exhibit virtually no change for 1H 2011 versus the projections provided in our earlier 2010 report. (See Figure 8). At some funds, there continue to be some pressure toward staff reduction offset by a meaningful 27 percent of private equity respondents planning to increase their staffing.
With the continued increase in time and attention of fund management towards the portfolio companies, the requirement to enhance staffing skills with operational management has become mission critical for some firms.
"Private equity executives know that managing operating companies requires some additional skills that their teams may or may not have. Adding value to their portfolio businesses is paramount and we see firms addressing this need for enhanced skills."
Director, Financial Services
The survey respondents identified target segments that are of the most interest for investment in 2011 (See Figure 9). The interest is highest in relatively stable industries including business services & other B2B, healthcare and information technology. While there is continued interest in investments as outlined in Figure 9 below, it is interesting to note the safer havens are leading the investments more so than the more cutting edge or higher risk sectors.
Figure 9: Full Year 2011 Target Sectors for Investment*
% of Respondents Showing Interest Business Services + other B2B 82% Healthcare 81% Information Technology 77% Manufacturing & Distribution 68% Financial Services 57% Consumer Products 57% Green or Clean Tech 57% Retail 39% Life Sciences/Biotech 38% Real Estate 23% *More than 1 sector were typically chosen
The PitchBook Annual Private Equity Breakdown 2011 cites the number of deals by industry for 2009 and 2010 as outlined in Figure 10. The Pitchbook data shows an increase of deals in 2010 of 11 percent versus 2009:
Figure 10: Private Equity Deals by Industry
Business Products & Services (B2B) 475 31% Consumer Products & Services (B2C) 325 22% Information Technology 182 12% Healthcare 192 13% Energy 112 8% Financial Services 135 9% Materials & Resources 77 5% Total 1498 Increase 2010/2009 11%
"We see a continued trend in the funds wanting to invest in industry sectors that can be considered "safe". While clean tech is a hot topic among many private equity funds, we are seeing investments in 'basic' industries that offer more stability and traditional methods for value creation and portfolio enhancement."
Partner, Financial Services
Time and Activities
The Pulse of Private Equity explores the amount of time that private equity fund professionals spend on fund activities. Figure 11A presents their activities in Q1 2010 versus the teams' activities as noted for Q1 2009. From 2009 through 2011, the trend continues to show a ramp-up in the amount of time for each fund activity. The increase in the teams' time spent on looking for, or working on, portfolio sales or liquidity events shows the biggest increase.
Figure 11A: How Much Time Did Your Team Spend on the Following Activities?
The amount of time that the private equity teams spend on essential fund activities continues to transition. From the baseline of Q1 2010 up through 1H 2011, the respondents increased their time spent on looking for new transactions and fund raising. See Figure 11B. While the time is relatively less than the time they spend on portfolio sales and working with existing portfolio companies, it accounts for the biggest increase. Clearly the respondents' teams are focused on the portfolio companies, their operations, business enhancement and achieving the final liquidity event. They have been and anticipate spending more of their time working with the existing holdings, not due to a lack of interest to sell, but out of necessity. Operating company skills and management oversight have become essential for the fund teams.
Figure 11B: 2009 - 2011 Team Time Shifts
|Q1 2009||Q1 2010||March 2011||1H 2011|
|Working with existing
|Looking for or working
on new transactions
|Looking for or working on
portfolio sales or liquidity events
"Looking around the corner, private equity funds tell us that they see more and more fund raising, but that there are no markers pointing to a return to anywhere near the level of activity of previous years."
Looking around the corner to the full 1H 2011, the PE firms are spending incrementally more time on fund raising, but it continues to be a smaller component of their teams' time. In April 2011, Preqin reported the highest amount of private equity managers in the market at one time with 1,649 funds worldwide out on the road looking for $663 billion in fundraising. While this points to renewed activity for private equity, the quarterly fundraising is still very low. See Preqin's data in Figure 12.
Figure 12: Quarterly Fundraising Q1 2007 - Q1 2011
"The lower ratings by LPs for the importance of the fair value investment valuation does not suggest this is no longer an issue. Instead its relative rating highlights the critical nature of the other areas explored on manager and investment due diligence along with fund terms, fees and expenses."
Private equity executives were asked to give their view on the importance their limited partners placed on fund operations which is summarized in Figure 13.
Figure 13: PE Executives View on LPs' Areas of Interest
|Rated as Moderate to High Level
|Q1 2009*||Q1 2010||March 2011||1H 2011|
|Due diligence related to the
|Due diligence process related
to the investments
|Management and incentive
fees and other expenses
|Other fund terms
(e.g., lockups, commitments)
|Fair value investment valuation
|*Per respondents of EisnerAmper The Pulse of Private Equity Survey 2010|
The concerns that private equity executives have with respect to limited partners are significant. The private equity executives rate their perception of the LPs interest in due diligence very high, especially as related to the manager (91 percent) and the investments (83 percent), as well management and incentive fees and other expenses (79 percent). There is a real and sustained increase in their limited partners' interests from the baseline noted in Figure 13 for Q1 2009. The LPs are closely watching their GPs, a trend that is unlikely to change.
The respondents did not cite high numbers of foreign or sovereign LPs currently investing in their funds. See Figure 14. However, they saw this category increasing along with increased numbers of LPs from each of the investor categories.
Figure 14: Current Type of LPs Working with Private Equity Funds
% of Respondents High Net Worth Individuals 57% Institutional Investors 51% Family Offices 46% Domestic 43% Pension Plans 27% Foreign 19% Sovereign 8%