Hope Springs Eternal For PE Pros

Private equity professionals are just as hopeful about the future as they were around this time last year. According to a new survey sponsored by Akin Gump, BMO Capital Markets, and mergermarket, buyout folks expect the market for financing to come back in the second half of next year.

That sounds a lot like what they were saying around this time last year, a hopeful prediction that sadly has not come true. I asked Akin Gump Partner Patrick Dooley what that says about private equity investors. His response was “Hope springs eternal.” He also insisted insisted that buyout pros do really expect that deal financing will return next year and valuation gaps will narrow.

The survey found that 44% of survey respondents who expect valuation gaps to narrow predict it happening in the first half of next year. Meanwhile 61% of those surveyed said they expect financing markets to improve in the first half of 2010.

Until that happens, the study, titled “Private Equity Under Dynamic Market Conditions,” suggests buyout firms employ strategies such as earnouts and rollover equity as a way to bridge the gap between the equity they’re willing to throw down and the amount of senior debt the company can secure.

One notable part of the survey was the fact that LBOs remain the preferred method of investing for the large majority of respondents–forget all this talk of PIPEs, minority deals and loan to own. Akin Gump wrote:

Many commentators expected the turmoil in the credit markets to drive private equity sponsors from LBO structures to alternative structures that were not as reliant on debt financing. Instead, the principal impacts have been on deal size and valuations. The current credit markets are more accommodating to middle market and smaller transaction sizes and lower valuations support expected target returns.

You can download the hopeful entire survey here:

Private Equity Under Dynamic Market Conditions: Portfolio Company Management & Key Deal Terms

FINAL REPORT – Private Equity Dynamic Conditions