Dealmakers see economic recovery in 2010 or beyond

Private equity dealmakers believe an economic recovery will not occur until 2010 or beyond and the energy sector will be the most attractive for private equity investors once the market turns, according to a survey by accounting giant KPMG.

About 43 percent of the 200 private equity investors questioned believe the economy will turn around next year, while 39 percent said the recovery will happen after 2010. Just 7 percent of dealmakers surveyed expect a recovery in mid-2009, while 11 percent said the economy could rebound by the year’s end.

“Private equity by [its] nature work[s] to anticipate the downside in the market, so I would say those who took this survey are planning for the worst in an elongated cycle and hoping for the best,” Shawn Hessing, national managing partner of KPMG’s US private equity group said in a statement. “They want no negative surprises.”

More than 35 percent of the private equity investors who responded to the survey said energy would be the most appealing sector for investments as the economy recovers, with financial services and technology sharing second place, followed by healthcare and business services.

Taking a longer-term view, 40 percent of respondents see infrastructure investments – specifically highways, sports arena, public transportation and utilities – as the next “meaningful” investment opportunity for private equity. Also, 33 percent of respondents see emerging markets as a good future opportunity, while 27 percent see public-private partnerships (PPPs) as a strong opportunity for private equity.

“While infrastructure may not offer the historic returns of 25 to 30 percent, a 15 percent rate of return on an infrastructure project may appear more acceptable when viewed against the significantly lower returns that have become typical in today’s market,” Hessing said.

Many respondents said they were concerned about potential future legislation surrounding PPPs and distressed bank assets, according to the survey. Dealmakers also fear the backlash that could come from high profits garnered from a PPP.

“The respondents are concerned that the rules of engagement on public-private partnerships will likely change as the market develops, and the private equity sector is seeking more clarity before investing,” Hessing said.