BDO Study: PE Firms Taking Conservative Approach to Deal-Making in 2016

A recently released survey by professional services firm BDO USA, LLP (“BDO”) reveals that private equity firms appear to be cautious about making deals in 2016.

BDO Study: PE Firms Taking Conservative Approach to Deal-Making in 2016

BDO released its Seventh Annual BDO Perspective Private Equity Survey, in which they surveyed 147 senior executives at PE firms throughout the United States and Western Europe.

The major finding from the study is that 95 percent of PE firms expect to close five or fewer deals in 2016 (as opposed to closing more than five deals), compared to 87 percent in 2015. The increase suggests PE firms are taking a more conservative approach to deal planning, as they view the current market challenging for getting deals done.

Portfolio Performance, Pricing Expectations

According to BDO, the financial performance of fund managers’ portfolios, in part due to economic uncertainty, may be a cause for their cautious outlook. The survey found that:

“Twenty-two percent of respondents report that 16 to 20 percent of their portfolio companies are performing below forecast, while another 20 percent of respondents say 20 percent or more of their portfolio companies are underperforming.”

More than one-third of fund managers noted that they see pricing as the biggest challenge for them in 2016, as it was in 2015. According to the survey, 64 percent of fund managers believe that differences between buyers’ and sellers’ pricing expectations are their biggest obstacle to closing deals this year. This is an increase from last year, when the percentage was 48 percent.

IT, Healthcare, Manufacturing Sectors Sought After

In spite of the cautious approach to investment activity in 2016, there are certain industries that fund managers will likely look towards when it comes to deal-making.

68 percent and 63 percent of fund managers named the technology and healthcare/biotech, respectively, sectors “as the industries most likely to experience rising valuations throughout the coming year, consistent with their sentiments last year.”

According to BDO, IT service and cloud computing companies have created higher valuations in the technology sector, and consolidation among service providers and interest in emerging healthcare technology companies have led to continued private equity M&A activity in the healthcare/biotech industry. These industries represented the top sectors last year as well.

Outside of the technology and healthcare/biotech industries, fund managers are optimistic about the available investment opportunities in the manufacturing sector. The survey reported that approximately 25 percent of fund managers believe that the “manufacturing sector will generate the greatest opportunity for investment in the next 12 months as manufacturers take advantage of low energy prices to ramp up production and minimize the associated costs.”

Global Investment Opportunities, but Brexit could have an impact

The BDO survey also provides some insight into fund managers’ thoughts on global investments. When asked which one geographic region, outside of North America, they think “presents the greatest opportunity for new investments,” fund managers responded:

  • 54 percent, Continental Europe;
  • 15 percent, Asia, including Southeast Asia;
  • 14 percent, South and Central America;
  • 9 percent, Middle East and Africa; and
  • 9 percent, Eastern Europe, including Russia.

65 percent of fund managers believe that the international environment offers a favorable opportunity for investment. On a related note, the percentage of firms who reported that they plan to pursue more cross-border deals this year increased from 28 percent last year to 35 percent this year.

If interviewed now, however, fund managers may have changed their views with respect to cross-border investments, particularly in Continental Europe, due to the looming threat of Brexit – the possibility of a British exit from the European Union (EU), which is up for a vote on June 23.

It has already been reported that private equity deals in Europe have dropped 44 percent in value and 28 percent in volume in 2016 (data as of March 10), over the same period in 2015. This decline has been attributed to the uncertainty over whether Britain stays in the European Union, driving fund managers’ fears of not receiving the maximum price for their assets.

This leads to the question: would fund managers have responded the same way to BDO’s survey when asked about cross-border investments now that the threat of Brexit is having repercussions?

Nevertheless, although PE-firms are being cautious in their 2016 deal-making plans, it seems that they are open to and looking for investment opportunities in industries and geographic regions where they believe they can generate the most long-term gain.

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