What Volatility? PE Execs Look to Buy in 2012, Study Says

Last year’s broad market volatility and plunge in deal flow is apparently not dampening the spirits of PE fund managers, according to a study from BDO.

A majority, or 70%, of PE fund managers expect to close about two to three deals during the next 12 months, the global accounting firm said. The 70% includes managers of all fund sizes, BDO said.

The optimism comes despite a drop in deal flow for nearly half.  Forty-seven percent of fund managers reported closing no new deals in 2011, BDO said. Another 19% said they completed only one deal. Small funds, those with less than $250 million AUM, had it worse. Two-thirds, or 66%, of small pools said they closed no new deals in 2011.

“Private equity fund managers are approaching the New Year with cautious optimism as uncertainty in Washington and Europe continues to impact the global economy,” said Lee Duran, a BDO partner and PE practice leader, in a statement.

PitchBook conducted “The BDO PErspective Private Equity Study,” based on interviews with more than 100 senior PE execs in Q4 of 2011. The GPs came from U.S. firms with $10 million to $72 billion in AUM.

GPs of all sizes are looking to spend in 2012, BDO said. More than one-fifth, or 22%, expects to deploy $30 million to $50 million of capital through new deals and add-ons. Another 16% anticipate investing $51 million to $100 million. Middle market funds, those with $250 million to $500 million AUM, are the most optimistic. Nearly nine in 10, or 88%, of middle market PE execs are looking to invest $30 million or more during the next 12 months, BDO said.

What’s causing this optimism? Portfolio values are apparently rising. About 67% of PE professionals said the overall value of their entire current portfolio jumped in the last 12 months. Another 21% said that “none” of their portfolio companies are performing below expectations. Roughly the same amount, or 22%, of PE execs said that more than 20% of their companies are performing below forecasts, BDO said.

Jack Kearney, an MD at BDO Capital Advisors, said that PE execs are well-aware of global economic conditions. A higher percentage of portfolio companies are performing at or exceeding expectations, Kearney said.

“The expectations are that fewer portfolio companies will file for bankruptcy [this year],” Kearney said. GPs are “looking to deploy more capital because it appears that, on the ground, they’re just seeing slightly better conditions…there is optimism but not wild-eyed optimism.”

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