Private equity professionals worry about what the debt markets hold in store, but for the time being they’re pleased with the performance of their portfolio companies.
Those are the top-line takeaways from a new survey-based report published jointly this month by the Association for Corporate Growth, a national corporate networking organization, and Thomson Financial, publisher of Buyouts. Sixty-eight percent of private equity professionals who responded to the survey predict that in a year’s time the health of the debt markets will be worse than it is today. That’s way up from the 46 percent who had doubts about the debt markets in the same survey taken six months ago.
The report, “Mid-Year 2007 ACG/Thomson DealMakers Survey,” is based on surveys completed by 1,011 ACG and Thomson Financial customers, 22 percent (about 222) of which are classified as buyout or venture capital firms, in turn representing about 2,000 portfolio companies. Most of the private equity firms responding were relatively small: More than two-thirds (71 percent) have between $100 million and $500 million in capital under management. The balance of the surveys came from investment bankers, lenders, corporate professionals and service providers. Most respondents were U.S.-based.
The survey, which has come out twice a year since 2005, uncovered several concerns weighing on the minds of private equity professionals, in addition to how well the debt markets will hold up. Nearly half (49 percent) said that they felt that the current amount of capital available for private equity investment is “much too high.”
What factor is the most likely to impede industry and company growth in the next six months? The most popular response, cited by 37 percent of all survey respondents, was a rise in interest rates, followed by higher energy costs (21 percent). Next came inflation (12 percent), which barely beat out terrorism and war (11 percent), which in turn edged out labor costs (10 percent). (See charts for responses to other topics in the survey.)
Six months ago, respondents’ concerns were spread more evenly, with interest rate hikes (20 percent) barely edging out energy costs (19 percent), terrorism and war (19 percent), labor costs (18 percent) and inflation (12 percent).
As it stands now, private equity firms have no immediate fires to put out. With respect to EBITDA, private equity respondents reported that, on average, more than half of their portfolio companies were performing above plan during their last fiscal years, and that more than two-thirds of their portfolio companies generated more EBITDA in the latest fully completed fiscal year than they had the prior year.
“EBITDA indicates the ability to support leverage, the ability to support investment in capital equipment and the ability to support expansion, and much of that is beating expectations at the moment,” ACG Chairman Paul Stewart told Buyouts.
Stewart noted that this was the first time the ACG/Thomson DealMakers Survey collected data on portfolio companies. He said that keeping an eye on the percentage of portfolio companies that are outperforming expectations is a good way to gauge the market’s health. “If we see that number come down in subsequent surveys, that’s going to be an indicator that tougher times are ahead,” Stewart said.