While 2014 proved to be a strong year for private equity, GPs are cautiously optimistic for this year according to the sixth annual PErspective Private Equity Study from BDO. 41 percent of respondents reported closing more than five deals last year but by contrast, only 8 percent expect to do so this year. The majority of respondents expect to close between one and five. If those expectations prove correct, capital markets participants may be in for a somewhat tepid year in terms of deal flow.
A majority of respondents (56 percent) categorized the markets as either very or somewhat favorable. However, that represents a decline from the 72 percent that categorized the market that way last year.
“Private equity experienced a big year in 2014, as the availability of cheap debt, overhang of dry powder and relative optimism about the U.S. economy contributed to a high volume of deal flow. Funds needed to deploy cash,” says Lee Duran, partner and private equity practice leader at BDO. “While signs are still positive for 2015, fund managers are cautious, eyeing currently high price multiples, potential interest rate hikes and ongoing competition from strategic buyers as factors that could impact deal flow in the year ahead.”
Exits and capital raises are more likely to be the drivers for this year according to respondents. 58 percent of GPs said holding periods will be longer than they were 12 months ago, which while still being a majority is also the lowest percentage since BDO began conducting the survey in 2009.
While exit timelines have shifted, exit assumptions have remained fairly consistent, with 41 percent of fund managers reporting no change in their preferred exit routes when compared to 12 months ago. The largest percentage of survey respondents reporting a change (25 percent) say they have increased their focus on sales to strategic buyers and another 18 percent say they have increased their focus on sales to financial buyers.
Going forward, managers have the highest expectations for activity in manufacturing marking a trend that has been going strong for the past three years. 34 percent of respondents cited manufacturing as their top sector followed by technology, healthcare and biotech.