Studies Suggest Industry Shakeout Looms

Many private equity professionals believe a substantial number of their brethren will not be able to raise funds in the future because of heightened investor demand and intense competition for deals, according to a new study by tax and audit firm Grant Thornton LLP.

Grant Thornton’s findings, based on interviews with 144 buyout firm executives worldwide, are similar to those that the placement agent Triago found in a recent study of its own. That analysis found that up to one half of today’s private equity general partnerships could disappear over the next decade or so, peHUB reported. Triago said that poor returns from credit bubble vintages and smaller commitments to fewer managers would drive the shakeout.

Said Steve Brady, a partner and head of transaction advisory services at Grant Thornton: “I think that certainly as the industry continues to face challenges that there’s certainly going to be winners and losers in that process.” The firm did not predict how many firms the shakeout would affect.

About half of the respondents to the Grant Thornton survey characterized the fundraising environment as negative and none viewed it as positive. “Given this, it is unsurprising that there is some evidence of stagnation in fund sizes, with under half of private equity firms expecting their next fund to be larger than its predecessor,” the study states.

About 21 percent of Grant Thornton’s 144 study participants were from North American firms, while 33 percent were from Western Europe; 25 percent were from the BRIC countries plus South Africa; 11 percent from the Asia-Pacific region; and 10 percent were based in the Middle East or North Africa.

The study reveals some strains of optimism as well. Fully two-thirds of the executives, for example, predicted that investment activity will increase over the coming year. The respondents’ interest in the consumer sector could also be interpreted as a belief among many buyout firms that the economy is improving. “That was once of the results that certainly jumped out at us as a bit of a surprise,” Brady said, adding that many of the respondents were executives focused on higher growth emerging markets. In particular, the study says the burgeoning middle class in Southeast Asia is driving interest in the consumer sector.

The Grant Thornton study also reveals that executives believe the consumer sector is the most active for investment this year.

Following the consumer sector among most active sectors were business services, industrials and manufacturing, health care, telecommunications and media, and financial services, according to the study.

Somewhat surprisingly, the study also finds that North American respondents believe heightened competition and new regulations will actually create new jobs, in part to comply with impending regulations. Half of North American respondents said they expect to increase their organizational head count over the next year, largely in portfolio company management, back office research and deal origination.