GT’s report is titled “A force for growth” and is based on interviews with 444 private equity executives worldwide. Respondents highlighted the consumer sector as the most active area of investment in 2011, followed by business services, industrials/manufacturing, healthcare, telecom/media/telecommunications. “It is significant that the consumer sector is cited as the most active. This could change if a double dip recession does occur,” said Mr. Brady.
The study also found that private equity is well entrenched as a source of funding in North America with a significant number of US middle-market companies owned by financial buyers. In spite of their strong domestic focus, 40% of North American general partners expect that cross-border M&A within their portfolios is likely to take place, primarily involving Canadian and US companies. On the other hand, these firms also demonstrated less interest in investing in businesses in Asian, European and Latin American countries because of the complexity in structuring deals, cultural issues and their lack of offices in foreign countries.
The study revealed that successful firms are likely to have addressed the need to grow their portfolio companies by relying on operational improvements rather than financial engineering as a means to build value. Forty six percent of respondents cited becoming involved in important management functions as a major driver of growth, while 35% reported financial planning and 30% human resources as key factors in generating growth.
When it came to deal flow in North America, 52% of respondents thought that the majority of transactions would be derived from family-owned businesses and privately-held companies. The next 30% thought that secondary buyouts would account for their primary source of new deals, while 15% said corporate divestitures would account for the bulk of deal flow.
The study indicated that a shift in the relationship between private equity firms and their limited partner investors has taken place, favoring the latter. Funds that demonstrate high returns can raise capital from more quickly, reflecting a flight-to-quality by investors. Comments by North American respondents indicated that investors, who are also seeking greater transparency and realized returns from exits, were more focused on investment strategies and fund documentation requirements in 2011. Nonetheless, the survey found many GPs were optimistic about raising larger funds despite increased reporting demands and a difficult fundraising climate.
The analysis revealed that new investor demands, coupled with increased competition for transactions from other financial sponsors and strategic acquirers alike, could spell trouble for some firms. Cited as the most significant challenge facing the private investment industry by North American GPs, increased competition for healthy company transactions between PE groups and strategic acquirers has already led to an increase in purchase multiples. As a result, the likely outcome from more competition and other challenges will create a period of “Darwinism,” or survival of the fittest among financial buyers in coming years.
Respondents in North America believe that intense competition and new regulatory requirements, though, will create new jobs. Half of North American respondents, for example, said they anticipate increasing their organizational head count over the next year, largely in the areas of portfolio company management, back office research and deal origination.
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