Private Equity Coasts as Investors Wait Out Volatility

“The U.S. has a sustainable energy cost advantage thereby making U.S. manufacturers more competitive globally. As such, the appeal of the manufacturing industry for private equity investment may continue for years to come.”

The survey found fund managers polarized in their expectations for energy and natural resources companies.

Fifty-seven percent of respondents believed the industry would continue to experience decreasing valuations over the next 12 months, more than a third believed valuations would increase and 15% said natural resources and energy would offer the greatest opportunity for investment.

BDO said this disparity was likely driven by uncertainty about how natural resource and energy companies would weather the continued lower prices and fallout of weaker companies. International Investment

Despite slower deal flow in the second half of 2015, 65% of fund managers expressed a generally optimistic view of the international investment environment. However, 65% also did not anticipate increasing activity over what they were currently doing.

A minority of firms surveyed said they planned to pursue more cross-border deals this year, suggesting, the study said, that some funds may be increasingly willing to expand their geographic focus in order to find good deals.

The study found that although attitudes surrounding international investment have largely remained the same, fund managers have significantly shifted their views on where they believe opportunities lie.

Survey respondents perceived Europe as the best region for new opportunities outside North America in 2016, possibly viewing Europe as a more stable and predictable market compared with some of the uncertainty in other regions, according to the study.

Only 14% of private equity managers thought Asia would present the greatest opportunity for new investment, versus 41% in 2015. China’s perceived slowdown has raised concerns that a depreciation of wealth and investor jitters may create fewer investment opportunities in the region.

Likewise, just 14% of respondents saw Latin America, also mired in economic hardships, as a top investment opportunity, down from 45% last year.

The challenges funds face in pursuing international activity remain largely the same as in 2015. The top three listed by respondents:

• Local resources, 31%
• Cultural nuances, 30%  
• Regulations affecting cross-border acquisitions, 23%

Other Findings

Fifty-seven percent of private equity leaders said they specialized in an industry or region in order to identify and successfully execute deals. They used their capital to focus on key industries and markets, especially in less traditional areas where capital may be lacking.

Fifty percent said they worked with buy-side intermediaries as a sourcing strategy, suggesting, BDO said, that private equity sponsors continued to rely on direct networking and relationships with intermediaries, such as bankers, in order to target potential investment opportunities.

A big majority of fund managers reported that they had sought add-on acquisitions (buying a company to complement an existing platform business) last year in response to current market conditions, and most planned to use this strategy in 2016.

Competition for sizable deals is fierce in the current marketplace, BDO noted, and with deal volume languishing, these tuck-in deals offer a relatively low cost and low stakes way to add value to an existing portfolio.