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

Enterprise-Wide Analytic Strategies Increase Odds of Greater Financial Growth

Survey finds double-digit growth of more than 15% in revenues and operating margins, as well as improved risk profiles.

A survey of 1,500 global C-level executives found that once an analytics strategy is rolled out at the enterprise level, there is a greater probability of double-digit growth.

The study, Data & Advanced Analytics: High Stakes, High Rewards, prepared by Forbes Insights in conjunction with EY, New York, found that 70% of leading organizations use advanced analytics to overhaul their businesses. It also found that advanced analytics drives double-digit growth of more than 15% in revenues and operating margins, as well as improved risk profiles. In addition, half of the global executives surveyed plan to allocate at least $10 million over the next two years toward analytics strategies. The report fielded responses from more than 1,500 global executives from companies with at least $500 million in annual revenues.

Specifically, the report found that organizations with a well-established and integrated analytics strategy considered their competitive ability in data and analytics “market leading.” Of these organizations, 66% achieved revenue growth greater than 15%, while 63% reported that operating margins increased more than 15% in 2016. In addition, 60% of these companies said they also improved their risk profiles. Given this success, companies said they were going to spend in excess of $10 million on data and analytics over the next two years, the report found.

The top users of analytics also showed major gains in revenue growth, operating margins and reducing their risk profiles. Specifically, 66% of the leaders in analytics improved their revenue growth more than 15%, while 63% grew their operating margins by more than 15%. And 60% said they reduced their risk exposures.

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In terms of competitive differentiation among the companies using advanced analytics, the study found that the most proficient were mature companies that used their data analysis and collection efforts company-wide. One of the biggest detriments to achieving data success was a lack of cooperation from the management committee.

Other results of the study found that 70% of the top performers of analytics used the data to overhaul strategy and improve their competitiveness. Of the top performers, 75% used a full array of analytics within a specific framework. Of these, many used artificial intelligence and other predictive methods for scenario modelling.

Where there are demonstrated benefits to advanced analytics, the greatest stumbling block to implementing an advanced analytics program was “around the human element, not the technology,” the study said.

“Collaboration, culture and skills were cited as key hurdles throughout the business lifecycle, creating a wider divergence between organizations that are focusing on the people aspects – and separating winners from losers,” according to Bruce Rogers, Forbes’ chief insights officer. One reason was that data and analytics did not flow smoothly around the company, from department to department.

 Benefits of Advanced Analytics

Relying on predictive financial analysis can help CFOs rely less on transaction data and more on using sophisticated analytics to gauge the impact of different strategic directions. This improves risk management and thus the chances of financial success, according to the company.

The company also said on its website that “sophisticated predictive analytics will allow the CFO to generate value from data insights and change outcomes based on that insight” and that improved analytics “will be the bastion of the successful CFO and their highly-skilled finance team.”

To become an analytics-driven CFO, the firm recommends that the CFO team be able to predict various financial and risk scenarios, and then develop test scenarios to minimize risk or capitalize on opportunities. They also suggest that “micro-insights” be encouraged from all levels of the company, since these can deliver the greatest benefits.

By Chuck Epstein

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