Buyout Shops Fear Lower Returns

The prospect of achieving lower returns for backers weighs heavily on the minds of buyout professionals as the new year gets under way, according to the most recent installment of the bi-annual ACG/Thomson DealMaker’s Survey. So does a related concern: growing competition for companies to buy.

Just under a third of buyout pros in the survey pointed to “lower returns” as their greatest threat today, followed by “competition with other private equity firms,” (25%) and “competition wit hedge funds” (11%). Just 10% of respondents pointed to “regulatory scrutiny” as their greatest threat, despite the ongoing investigation into possible collusion by buyout firms on their club deals.

And what returns are buyout firms willing to accept on their deals? Nearly a third (32%) said 21-25%, the most popular choice; one in four (25%) said 16-20%; 14% said 26-30%; and 13% said 11-15%.

More than 450 buyout firms participated in the ACG/Thomson DealMaker’s Survey late last year, responding to sixteen questions carved out just for them (see charts, ). All told, more than 1,000 professionals operating in the broader M&A, including investment bankers, lenders and corporate executives, also took part in the survey.

Growing competition for deals emerged as perhaps the biggest theme of the buyout portion of the survey. Asked to assess the amount of private equity capital available for transactions nearly half (45%) of respondents labeled it “much too high,” followed by “a little higher than it should be” (32%). Just one in five (20%) respondents called the amount “appropriate,” while a truly contrarian 2% called it “a little lower than it should be.”

Respondents demonstrated little love for hedge funds, which have begun muscling in on the buyout market in the last few years. More than a third (37%) viewed their participations in the buyout market as “somewhat negative”—the top response out of five possible options—while another 10% viewed their participation as “very negative.” Asked to pick the effect hedge funds are having on the market, nearly two-thirds (64%) responded that they are “increasing competition and driving up prices.” Still, nearly half (46%) also credited them with “creating more options for buyers and sellers.” (Respondents to this question were able to pick more than one answer.) For a full copy of the results e-mail david.toll@thomson.com