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Private equity firms expect rising deal flow in 2010

26 January 2010

More than a quarter of private equity firms failed to make an investment in 2009, however the majority of those in the industry reckon the tide is turning and that 2010 should see rising numbers of investments.

A survey of more than 100 private equity firms by business advisor Grant Thornton found that 26% of firms steered clear of parting with any cash last year. Nevertheless, sentiment now appears to have changed, with 71% of firms expecting to see an increase in the volume of new investments over the coming 12 months. Meanwhile, 25% are betting that deal volumes will remain the same and 4% are predicting a decrease in activity.

In a separate, more bullish survey carried out by advisors BDO, nine out of ten private equity houses reportedly expect to see the rate of investments increase in 2010 and nearly half of them are growing their teams to staff-up for a surge in activity. BDO says that underlying this appetite to invest is a broad consensus that 2010 will be a good time to take advantage of lower valuations, supported by the ongoing availability of funds that were raised prior to the downturn.

Mo Merali, who heads Grant Thornton’s private equity operation, is more conservative about the near-term outlook. “In 2010, we expect the outlook for private equity in the UK to improve in relative terms, but we will not see a significant recovery of private equity before 2012, as the picture continues to be marred by the uncertain economic outlook,” he said.

Nevertheless, Merali points to a notable easing in raising debt financing as a key stimulus for the private equity industry. In his firm’s survey, 51% of the responses indicated that difficulty in raising debt to support new investments would be a main obstacles to closing deals in 2010. That was compared to 81% who named unrealistic vendor pricing and 66% who named difficulty in sourcing quality business for investment as one of the main obstacles.

In addition, 80% of respondents said they still needed to invest 25% or more of their latest fund. A total of 27% still needed to invest more than three quarters of their latest fund.

As far as companies are concerned, Alex White, a corporate finance partner at BDO, reckons that while businesses have been vocal in complaining about lack of access to debt, on the equity side, access to risk capital has never been better.

“There is unprecedented availability of private equity which still needs to be invested, creating opportunities for business owners who want to sell or raise finance for growth and expansion,” he said.

“This said, the outlook does vary across the main business sectors – investments in healthcare, environmental, energy and business services will be in high demand while private equity houses remain more divided about investing in consumer-facing businesses like retail, hospitality and leisure.”