While the private equity landscape began 2012 with a lot of uncertainty and concerns, conditions have improved substantially over the past five months. Bain & Company, a leading PE consultant, recently released their Global Private Equity Report 2012, highlighting the current state of the PE market. While 2011 may have been a disappointing year for private equity, market conditions around the world have started to shift towards creating a more positive environment for PE activity to take place.
First, both investment grade and high yield debt markets are open, creating additional investment opportunities in the leveraged buyout (LBO) sector. The historical low interest rates currently obtainable by private equity investments are also favorable, pushing up equity returns and making additional leverage attractive and affordable on a cash flow basis.
In addition to favorable debt markets, there are simply more available firms in 2012 than in prior years. Over the last several years, many companies were distressed and struggling under the weight of over levered balance sheets, making investment difficult in all but the most aggressive distressed company acquisition plays. Now, most firms have remedied balance sheet deficiencies and reduced debt in their operating structures, creating ideal private equity opportunities.
Equity funds are also available in great quantities. Over $1 trillion in “dry powder” sits on the sidelines today, and Bain claims that 40% of it is to be directed at buyouts. This available cash equity is spread around the globe and held by many private equity firms, suggesting that acquisitions will be undertaken in nearly all jurisdictions.
The one area of concern for private equity mangers is the lack of activity in Initial Public Offering (IPO) market, especially in terms of IPO exits for investment firms. The absence of one of the traditional private equity exit strategies may discourage some fund managers from deploying funds towards firms that don’t have a well-defined exit strategy outside of the IPO market. While the IPO market was certainty boosted by the Facebook offering, negative tones are now emerging about how the deal was executed, and this may pose a risk to private equity in 2012 if firms are discouraged away from this market.
With the strong potential overall prospects for private equity investments in 2012, this should prove to be an attractive market for financial professionals. Firms will be looking for talent that understands the operations and intricacies of the business targets that managers are looking to acquire. With the amount of cash on the sidelines earning very low interest rates, many fund managers will be force to deploy the cash in 2012, and will need guidance from those with industry experience to select the optimal portfolio assets.
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