Buyout survey says firms fear low returns

The possibility of achieving lower returns for backers weighs heavily on the minds of buyout pros as the New Year gets under way, according to the recent 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, followed by “competition with other private equity firms” (25%) and “competition with hedge funds” (11%). Just 10% of respondents pointed to “regulatory scrutiny” as their greatest threat, despite the ongoing Department of Justice investigation into possible collusion (or club deals) by buyout firms.

And what returns are buyout firms willing to accept on their deals? Nearly a third said that returns of 21% to 25% and one-in-four respondents said they would accept 16% to 20 percent.

More than 450 buyout firms participated in the 16-question survey late last year. Plus, more than 1,000 professionals operating in the broader M&A industry, including investment bankers, lenders and corporate executives, also took part.

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

Also of note, respondents demonstrated little love for hedge funds, which have begun muscling in on private equity deals in recent years. More than a third 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.” When asked to pick the effect that hedge funds are having on the market, nearly two-thirds said that they are “increasing competition and driving up prices.”

Still, nearly half also credited them with “creating more options for buyers and sellers.” —David Toll