This year's BDO Private Equity survey highlights that in 2011 there will be significant pressure to both ratchet up investment activity and arrange the exits of older investments to return cash to LPs.
This has important implications for all company owners who have delayed selling their business in the downturn and suggests 2011 would be a good year to sell or raise new equity to repay debt or expand their business.
PE has unprecedented high levels of capital to invest and but due to a lack of companies for sale nearly 75% of the PE houses surveyed said investment activity was too low in 2010 while 98% are confident that now is a good time to increase investment activity.
PE houses are reducing dependence on bank debt and looking at other ways of making deals happen. 72% are prepared to fund more equity rich deals and in most cases are prepared to pay more for businesses to encourage vendors to sell. In fact 82% of private equity managers have confirmed that prices they will pay in 2011 would be up to 10 per cent higher while 16% said they would pay 20% more.
Three quarters of PE houses surveyed said the rate of exits of older investments in 2010 was low, with 70% of their current portfolio being subject to some kind of exit delay. However the pressure to realise cash is building and 26% are now saying that selling older investments will be critical to their ability to raise another fund.
PE backed company CEOs are also concerned that delays to the planned exit are holding back growth and 46% of those surveyed told us a refinancing or change of ownership would be helpful. With the recovery in valuations we expect to see an increase in PE company exits and in particular an increase in secondary buyouts given the demand to invest is high.
The outlook varies across the main business sectors – investments in environmental, energy and business services will be in high demand while private equity houses are divided about investing in consumer-facing businesses like retail and hospitality. That said there are keen investors here too and sector sentiment is far from universal which means it is vital for owners to know who the right buyers are.
The private equity model is to "buy to sell" and so it is a key driver of M&A, corporate valuations. There is currently no shortage of private equity but there is a shortage of deal opportunities and that rationing is helping corporate valuations. This means owners who have deferred a company sale or equity refinancing should consider a transaction in 2011 before the market becomes crowded and while there is a window of opportunity to extract scarcity premium.
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