An increasing number of private equity firms anticipate that at least one of their portfolio companies will file for bankruptcy this year, according to BDO USA’s seventh annual PErspective Private Equity Survey.
Eight percent of the respondents said they are likely to declare bankruptcy for at least one portfolio company this year, up from 3 percent who said so last year. Larger fund managers represented the biggest proportion of those who said so, with 11 percent of firms with over $1 billion in assets under management expecting to declare bankruptcy for a portfolio company.
While 17 percent, the highest proportion since 2011, of respondents said none of their portfolio companies are underperforming, one-fifth said more than 20 percent of their portfolio companies are performing below forecast, and another 22 percent said 16-20 percent of their portfolio companies are underperforming.
Nonetheless, 67 percent of the respondents said their portfolio value went up in the past year, compared with just 13 percent who said it fell, and 19 percent who said it remained the same.
Looking back, 13 percent of fund managers said they declared bankruptcy for at least one of their portfolio companies in 2015, up from 12 percent and 8 percent in 2014 and 2013, respectively.
In order to handle weaker portfolio companies, over three-quarters, or 77 percent, of the respondents said they participated in cost-reduction programs and re-evaluating market strategies. The least popular option was engaging a turnaround professional, with a little over a quarter, or 27 percent, choosing that method.
In terms of exits, the number of private equity fund managers who have increased their focus on exiting their investments via strategic buyers has jumped from last year, BDO said.
Some 28 percent of respondents said they increased their focus on exits via strategic buyers this year, compared with last year’s 25 percent. Seven out of 10 of them also indicated that a sale to a strategic buyer is likely to produce the greatest returns, while the second most lucrative type of exit is a sale to a financial buyer, at 56 percent of the respondents.
Fund managers are shying away from the initial public offering market, as only 10 percent view IPOs as the likely option to generate most returns, according to the survey, roughly in line with last year’s findings.
The accounting and consulting firm conducted its survey from October to December with 147 senior executives at private equity firms in the US and Western Europe.