Buyout Pros Not Expecting Boom in Deal Volume

A new survey from BDO Seidman, an accounting and consulting firm, reports that buyout firms expect deal flow to rise, but not explode in 2010. Not revolutionary, but more hopeful than these types of surveys last year, which (correctly) predicted flat or declining deal flow for 2009.

More interesting, to me, is that 93% of PE pros surveyed reported headcount reductions at their portfolio companies (what about at the firms themselves?), 81% have renegotiated debt and 83% have reassessed their market strategy. Nearly three in ten (28%) have declared bankruptcy for one or more portfolio companies, and 38% have engaged a turnaround professional. All that says to me is that amend-and-extends, along with other private equity techniques, must be working, at least for the short term.

Update: The survey actually does address expectations around layoffs at private equity firms themselves. According to the survey, 86% reduced professional staff in the past year, and 40% plan to reduce more in the coming year. Guess those layoffs aren’t all behind us.

Read the rest of the results below.

From the survey:

Despite early indications that the economy is beginning a slow recovery, PE executives, regardless of fund size, anticipate closing the same number of deals next year as they did this year. Three-fourths (76%) of respondents report closing between one and five new deals between Q3 2008 and Q3 2009 – and 82% expect to close between one and five new deals during the next year. The good news is that while 11% of respondents did not close any deals between Q3 2008 and Q3 2009, just 2% anticipate closing no deals in the next year.

“While all signs currently point to private equity firms completing more deals in 2010 than they did in 2009, executives expect deal flow to remain in the one to five range for at least the next year,” said Mat Wood, Partner with BDO Seidman’s Private Equity Practice Group. “The lack of senior debt available, combined with pricing concerns, means funds will continue to face significant challenges as they work to source and close deals. Even so, executives are confident a change will come, and they’re rearing to go when it does.”

Funds Take Steps to Mitigate Losses – Worst is Behind Them?

According to BDO Seidman’s new study, half (51%) of executives surveyed say the overall value of their portfolio has decreased during the past year, and 56% say that more than 20% of their portfolio is performing below forecast or expectations. “There’s no question that private equity has been hit hard by the downturn, but as executives look forward to a more hospitable deal climate, they’ve taken steps to remedy their battered portfolios, positioning them for growth once the economy turns around,” added Wood.

Nine in ten (93%) report reducing headcount at their portfolio companies, 81% have renegotiated debt and 83% have reassessed their market strategy. Nearly three in ten (28%) have declared bankruptcy for one or more portfolio companies, and 38% have engaged a turnaround professional.

However, the majority of executives believe that the worst is now behind them and remain committed to their primary investment strategies. Just 17% have asked their LPs to allow them to change investment strategies to broaden opportunities, and only 8% will do so moving forward. During the past 12 months, 86% of respondents said they reduced professional staff headcount at the operating company level, but only 40% believe they will need to do so in the coming year.

Seeking Bigger Deals in 2010

Despite anecdotal evidence pointing to more, but smaller, deals on the table now, PE executives are hopeful that they will be able to deploy more capital in 2010 than they did in 2009. Nearly half (48%) of respondents report investing less than $29 million through new deals and add-on acquisitions between Q3 2008 and Q3 2009, and 30% report investing between $30 and $100 million. The tables turn when they look ahead: 38% expect to invest less than $29 million, and 39% expect to invest between $30 and $100 million in the coming year. Funds that invested $101 million or more in the last year expect to invest about the same amount of capital between Q3 2009 and Q3 2010.

These findings are from the inaugural BDO Seidman PErspective Private Equity Study, which examined the opinions of nearly 100 senior executives at private equity firms throughout the U.S. The study, which was conducted from September through October 2009, consisted of telephone interviews with senior level executives at private equity funds ranging from $10 million to more than $1 billion of committed capital.

Some of the major findings from the BDO Seidman PErspective Private Equity Study:

Opportunities in Asia …: Overwhelmingly, PE executives believe that other than North America, Asia still holds the greatest opportunities for new investments during the next 12 months (66%). PE executives are split when it comes to other locations, and count South and Central America (9%), the Middle East and Africa (9%), Continental Europe (8%) and Eastern Europe (7%) as potential geographical targets.

…and Healthcare: Despite recent buyout activity in the tech space, PE executives see the greatest opportunity in the healthcare (35%) and manufacturing (21%) industries, followed by natural resources (17%), financial services (12%) and technology (10%). Just 3% of executives believe there are opportunities in media, and even fewer (2%) see opportunity in retail.

More Capital Directed through New Deals Last Year, Add-ons Not Far Behind: More than half (56%) of capital invested between Q3 2008 and Q3 2009 went to new deals, while a sizeable portion (27%) went to add-on acquisitions and restructuring debt (10%). Among middle market funds – with active fund value of $101 million to $1 billion – the percentage of capital going to new deals was even greater (62%). One in five (21%) respondents from funds with less than $100 million deployed capital through restructuring debt.

Despite Economy, Execs Bring in a 3.5 GPA: When asked to give a letter grade to their firm’s performance in closing quality deals, nearly half (47%) give it a “B,” and 30% say their firms deserve an “A.” One in five (21%) believe their performance warrants a “C.”

Financial Risks: Sixty-seven percent of executives interviewed say that quality of earnings and cash flows are the biggest financial risk to their next acquisition, followed by structure and leverage (33%).

The BDO Seidman PErspective Private Equity Study is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to senior private equity executives, using a telephone survey conducted within a sample of private equity funds (ranging from $10 million to more than $1 billion).

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