1. Spring 2012
www.bdo.com
Executive 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.com
Private Equity Professionals Alfred Cepero, Miami
305-381-8000 / acepero@bdo.com
Express Cautious Optimism Wayne Corini, Washington, D.C.
301-634-4910 / wcorini@bdo.com
About THE YEAR AHEAD Jerry Dentinger, Chicago
312-239-9191 / jdentinger@bdo.com
General Partners Expect More Deal Flow, an Lee Duran, San Diego
Easier Fundraising Environment & Improvements 858-431-3410 / lduran@bdo.com
in Portfolio Company Performance Ryan Guthrie, Costa Mesa
714-668-7385 / rguthrie@bdo.com
P
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 / shendon@bdo.com
ahead. In 2010, as economic conditions impact private equity in the year ahead. This Kevin Kaden, New York
improved, general partners saw an uptick year’s study, which examined the opinions 212-885-7280 / kkaden@bdo.com
in deal flow, leverage return to the markets of more than 100 senior executives at
Bob Pearlman, Atlanta
and portfolio values increase. However, the private equity firms throughout the U.S., 404-979-7124 / bpearlman@bdo.com
momentum seen during the first half of 2011 found that despite the continued challenges
proved to be fragile. During the second half in the financing markets, private equity Matt Segal, Chicago
312-616-4630 / msegal@bdo.com
of the year, private equity experienced a professionals are confident that the industry
slowdown: the typical summer lull in activity is poised for recovery. With more than $400
extended well into the winter, as uncertainty billion in dry powder ready to invest and www.bdo.com/privateequity
in 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 and
the Private Equity Practice at BDO USA, an easier fundraising environment.
LLP conducted its third annual PErspective
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2. 2 Executive Summary BDO PErspective Third Annual Private Equity Study
CONTINUED FROM PAGE 1
In fact, the majority of private equity fund
managers (70 percent) – regardless of fund Approximately how many new deals did you close during the past 12 months
size – 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 may
not 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 Months
2011 when nearly half (47 percent) of fund
60%
managers reported closing no new deals and 50%
another 19 percent reported closing only one
new deal. Small funds – those with less than 48% 42%
40%
$250 million in assets under management –
were the hardest hit in 2011, with 66 percent
reporting 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 deals
deals, which remained relatively consistent
with the quality of deals seen in 2010. Nearly
half (48 percent) of respondents reported
Approximately how much capital did you invest through new deals and add-on
the financial characteristics of the deals seen
acquisitions during the past 12 months and how much do you predict you will invest
in 2011 were only moderately better than
during the next 12 months?
those seen in 2010, while another 37 percent
indicated the quality was the same as those Next 12 Months
seen during the previous year. When asked the Past 12 Months
34%
same question at the end of 2010, 21 percent
of 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 $1B
approaching 2012 with cautious
optimism. The last two quarters of 2011
proved to be slow for private equity, but
general 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 in
the 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 invest
Equity practice at BDO
regarding deal flow, respondents to BDO’s $30 million or more during the next 12
Even so, the majority of respondents remain third annual study are hopeful that they months. That’s up from 45 percent who
committed to their primary investment will deploy more capital in the coming year. reported investing the same amount during
strategies. 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 to
change investment strategies to broaden deploy $30 million to $50 million of capital Looking back, the majority of private equity
opportunities and only 11 percent stated they through new deals and add-on acquisitions funds (71 percent) directed the most capital
will 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
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3. Executive Summary BDO PErspective Third Annual Private Equity Study 3
CONTINUED FROM PAGE 2
asked about the year ahead, 95 percent of
respondents indicated that they will seek
add-on acquisitions, which is an increase from
88 percent of private equity funds that sought
add-on acquisitions during the trailing four
quarters.
u nds Increase Holding
Fu
Periods, Focus on Sales
to Strategic Buyers
At the same time that general partners are
expecting more, but limited, deal flow in
2012, they are feeling pressure on the other
end of the fund cycle as they look to exit their
investments and earn a return for investors.
While exit activity remained fairly steady
from 2010 to 2011, BDO’s third annual study
found that private equity professionals are
not optimistic about their ability to exit deals
in 2012. Despite the significant number of said they were receiving new commitments reallocating their assets away from alternative
mature portfolio companies in the market, from LPs in 2010 and only 40 percent who investments” as the most significant challenge
the 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 quantity
average holding period is longer now than it majority of first-time financial commitments of private equity funds raising new funds” and
was 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 funds
percent) indicated that their expected average (9 percent) and insurance companies (4
percent). u ortfolios Are in the
P
holding period is seven-12 months longer,
with another 28 percent indicating it is 13-18 Black, but Individual
months longer. However, an alarming one
“The significant number of firms that
Companies Continue to
in five respondents (19 percent) indicated
are either currently raising a new fund
Face Hard Times
that their expected average holding period is
The majority (67 percent) of private equity
currently more than two years longer than it or planning to do so in the coming
professionals surveyed saw the overall value
was 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 2010
When asked how their exit assumptions have
won’t all be smooth sailing. The notable when 70 percent of respondents saw such
changed when compared to 12 months ago,
an increase. However, when it comes to
21 percent reported an increased focus on capital overhang of private equity funds
individual portfolio companies, private equity
sales to strategic buyers, 15 percent reported is likely to impact commitments in the fund managers reported that there are fewer
an increased focus on a long-term hold and 7
coming year as investors look for funds’ underperforming companies within their
percent reported an increased focus on sales
cumulative distributions to increase.” portfolio now than one year ago. Twenty-one
to 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 an
u ndraising
Fu increase from 2010 when only 10 percent of
While 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 the
future, the majority are planning to raise new the majority of respondents acknowledged current economy with the largest percentage
funds in 2012. More than three in five (63 that they are facing challenges in regards of respondents (22 percent) indicating that
percent) respondents – regardless of fund to fundraising. When asked about the more than 20 percent of their portfolio
size – indicated that they are receiving new current fundraising environment, the companies are currently performing below
commitments 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
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4. 4 Executive Summary BDO PErspective Third Annual Private Equity Study
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“The stagnant global economy continues professional staff headcount and another 31 South and Central America Overtake Asia
to 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 Investments
portfolios. However, strategic fund level. At the fund level, 44 percent of The largest percentage of respondents (36
managers are taking steps now to respondents reported increasing employee percent) believe that, other than North
mitigate losses and ensure they are count during the past 12 months and 42 America, South and Central America will
well-positioned to maximize the return percent plan to do so during the next year. have the greatest opportunities for new
on their investments as the market investments during the next 12 months,
Other major findings from the BDO followed by Asia (27 percent). That’s a
rebounds.”
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 and
Equity 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 the
u 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 (15
to Mitigate Losses; percent of the deal value was debt. Looking percent) and Eastern Europe, including Russia
Bankruptcies 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, Followed
bottom line at their portfolio companies, of respondents not planning to use debt at by Healthcare
a trend that has been consistent during all in their next deal. While 18 percent of Private equity professionals continue to
the past three years. Sixty-one percent of respondents indicated that they did not use see the greatest opportunities for new
respondents to BDO’s third annual study have leverage in their last deal, only 9 percent are investments in the next 12 months in the
reduced headcount at portfolio companies not planning to use leverage in their next manufacturing (28 percent) and healthcare
performing 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 when
reduced costs by scaling back, 72 percent expects the cost of capital to increase by up 37 percent and 23 percent of respondents
have reassessed market strategy, 64 percent to 200 basis points during the next 12 months saw the greatest opportunities for new
have renegotiated debt and 74 percent have given the recent discussions regarding the U.S. investments in manufacturing and healthcare
monitored cash flow on a weekly basis. and global deficits. respectively. Thirteen percent of respondents
Private equity professionals appear confident
these efforts will continue to pay off. While
11 percent of respondents reported declaring
bankruptcy for one or more portfolio
companies during the past 12 months, only 3 Other than North America, during the next 12 months, which one of the
percent 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 Europe
Increasing Headcount 15% 18% Eastern Europe, including Russia
at Operating Company &
South and Central America
Fund level 4%
Asia, including Southeast Asia
At the same time, private equity fund
managers seem to be hopeful that their Middle East and Africa
portfolio companies will experience growth 27%
during the coming year. For the second year
in a row, the majority of private equity fund 36%
managers (62 percent in 2011 and 63 percent
in 2010) reported that they will increase
professional staff headcount at the operating
company level during the next 12 months.
When asked about the past 12 months, 57
percent of respondents reported increasing
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