Private Equity Managers Expect Less Uncertainty in 2017

Only 38% are planning to increase foreign transactions.

The private equity industry is expecting a much brighter 2017 compared with last year, according to a new survey of more than 200 private equity fund managers released by accounting firm BDO.

“We believe 2016 served as something of a reset for the private equity industry, which experienced a rocky 2015,” said Scott Hendon, partner and leader of BDO’s Private Equity practice. “But as we look ahead to 2017, there is plenty of reason for optimism. The economy is on the upswing, deal flow is increasing, and fund managers are eager to deploy uninvested capital in the year to come.”

That optimism seems to be mainly buoyed by the fact that 2016 was filled with so much uncertainty. But with the 2016 US general election, and the UK’s referendum to leave the European Union now in the rearview mirror, investors can look forward to the coming year with a little bit more clarity.  

“Election years always carry some degree of uncertainty for the PE community, but 2016 was a particularly contentious and volatile year,” said Dan Shea, managing director with BDO Capital Advisors. “Still, improving fund manager sentiment likely has less to do with who won the election and more with the fact that it’s over. It’s easier for fund managers to plot their strategy with such a huge unknown out of the mix.”

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BDO says that when the initial survey was conducted in October, some 56% of fund managers said they felt the investment environment was favorable, while 44% said it was unfavorable. But in a follow-up poll conducted two months after the election, the portion of fund managers who were optimistic jumped to 71%.

But not everything is rose-colored for the managers, who are decreasingly optimistic about fundraising. Only 53% of fund managers said they are raising new funds from limited partners, down from 64% in last year’s survey, and 74% in 2015.

Private equity managers are also tepid about international investments, with just 38% planning to increase foreign transactions in 2017. As a result, North America and Continental Europe are ranked the most attractive regions for new investments, cited as such by 53% and 23% of managers, respectively.

Brexit weighed heavily on the minds of European managers, 46% of which said they were worried about its impact on private equity investment. Meanwhile, only 5% of North American managers shared their concern.

“Cross-border investment will always carry unique risks and challenges” said Ryan Guthrie, partner, BDO Transaction Advisory Services. “Brexit, however, has further muddied the waters for PE firms exploring opportunities across Europe. Potential acquisition targets could redomicile, the UK could lose access to the broader market and investors will need to navigate an even more complex regulatory environment.”

Managers have also become increasingly less interested in Latin America, with just 6% citing it as a key investment region for 2017. Interest in Asia was also down, as 12% of fund managers said it was the best opportunity for new investments, compared to 15% of mangers who said that last year. And only 2% of managers thought their money abroad was best invested in the Middle East.

By Michael Katz

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