Study: GPs ready to ignite dry powder

A lull in overall investment activity coupled with pressure to deploy capital in existing funds is expected to spark an uptick in private equity deal flow in Europe and the UK, according to a new study by BDO.

UK-based general partners expect private equity deal volume in Europe to increase or maintain current levels during the next 12 months as many firms try to deploy capital against tight investment period deadlines, according to a study conducted by accountancy and business advisory firm BDO.

While 96 percent of GPs surveyed said they expect an uptick or at least no decline in investment activity, 65 percent said they would even be willing to pay a premium of 15 percent or more for a “good business in the current market”. Decreased deal volume over the past “several years” and pressure to put existing capital to work contributed to the rise in private equity investor appetite, according to the study. Other factors include a “backlog of private vendors looking to exit” and “stalled” selling of stakes in existing funds due to recent market volatility, the study said.

“I think clearly with what's now three years of pretty subdued investment levels, the pressure to get money out the door is quite acute,” corporate finance partner at BDO Alex White told Private Equity International. “[General partners] are prepared to pay high prices for good businesses because there aren’t that many opportunities.”

The most attractive sector for new investment during the next 12 months, according to survey respondents, is business services. Technology investments meanwhile, are also “in favour”, according to the study, which found retail and media-related investments to have “fewer opportunities”.

In terms of levels of dry powder, White said he had seen estimates of roughly $120 billion for Europe. As of 31 December 2010, roughly $376 billion remained uncalled, according to Cambridge Associates.

While battling pressure to invest by extending investment periods is “absolutely an option”, White said, “if you start asking for extensions and changing the nature of the agreement with LPs, what that potentially opens up is a negotiation. So I think the preference for managers is to not to have to ask for an extension.”

BDO’s survey sampled 50 UK-based private equity “decision makers”.