Private-Equity Firms Brace for Slump as Recession Concerns Persist

Firms are preparing for a potential economic downturn, devoting more capital to existing investments and locking in new funds, a BDO USA survey shows

Private equity firms may not know exactly when the next downturn will hit, but many are taking steps to make sure they’re ready, according to a new survey from mid-market financial advisory firm BDO USA.

The survey included responses from 200 firms split evenly between private equity and venture capital.

Nearly three-quarters of the private equity firms polled expect to see an economic downturn in the next two years, down from 89% in a similar survey a year ago, according to Scott Hendon, co-leader of global private equity at BDO.

In preparation for a downturn, around half of the private equity firms surveyed said they are getting more selective in assessing deals, while 46% said they are preparing for longer investment hold periods.

“Nobody wants to get caught on a downturn overpaying,” Hendon said. “They have been a lot more selective.”

Firms also want to make sure they have plenty of capital available to take advantage of investment opportunities that could emerge when the economic tide finally turns. Some 41% of private equity firms surveyed said they are raising additional capital to prepare for tougher times.

The crush of firms that have returned to market with new funds this year had already pushed US buyout fundraising to $246 billion as of early November, setting a pace for an annual record, according to research firm PitchBook Data.

More firms also expect to direct much of the capital they invest in the coming 12 months to strengthening existing portfolio companies, with around 28% of BDO survey respondents indicating that they plan to put much of that money into working capital for portfolio companies, up from 1% a year ago. Half of firms expect most of their money to wind up in new deals, down from 89% last year, according to the report.

Although favourable borrowing terms and low default rates have kept distressed investment activity low outside of certain sectors like retail and energy, a growing percentage of firms expect distressed assets to drive deals in the year ahead. Among this year’s survey respondents, 40% predicted that distressed companies will create investment opportunities in the coming 12 months, up from only 1% of firms that identified it as a potential driver in a separate survey last year.

“There’s quite a bit of leverage on companies,” Hendon said. “If there’s some sort of downturn there will be some problems with the debt.”

Source: The Wall Street Journal

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