PE on the up
Research from BDO shows that this year more than 90 per cent of mid-market private equity houses are preparing for a rise in investment activity, with over 40 per cent of PE houses surveyed expecting to recruit in 2010. Underlying this appetite to invest is a broad consensus that 2010 will be a good year to invest and that the vast majority of LPs want to see investment activity increase.
The challenge for lawyers and financial advisers will be to originate enough companies to satisfy the demand for new deals. Pricing has already increased ahead of expectations due to the rationing of investment opportunities, and many vendors who deferred sales are probably still thinking they may get a better price next year.
This could be a mistake. Selling in 2010 means selling in a less crowded market, and that means good businesses will attract special attention from buyers. The risk of CGT increasing in response to the inevitable income tax planning to avoid higher rate tax is significant, and that alone could wipe out the benefit of any moderate improvement in exit multiples.
Alex White, Corporate Finance Partner at BDO, says: “The outlook does vary across the main business sectors – investments in healthcare, environmental, energy and business services will be in high demand while private equity houses remain more divided about investing in consumer-facing businesses like retail, hospitality and leisure. That said there are keen investors here too – making it vital to really know who the right buyers are.”
Private equity funds are predicting exit activity will increase modestly in 2010. Taking 2009 as a base of 100 the rate of exit activity is expected to grow by over 50 per cent next year and over 75 per cent in 2012.
White says: “Everyone knows that LPs over-committed to private equity in anticipation of recurring exit proceeds. Exits dried up in 2009 and one-third of PE funds say exit activity was unsustainably low. 2010 looks like being a year of planning ahead of a flurry of sale activity next year. However current pricing is better than expected and so it could make sense for some businesses to bring their timetable forward.”
To see the results of our mid-market private equity survey please click here
