Private equity firms rein in their spending

01/07/08 16:43

Businesses looking for private equity funding may find it harder to secure over the next 12 months as investors reveal their bleakest outlook for more than five years.

A survey by accountancy firm Grant Thornton has revealed that most private equity investors will be doing fewer deals for less money over the coming year.

The Grant Thornton Private Equity Barometer found that the majority of investors are shying away from new deals and focusing on their existing investments, meaning a sharp drop in deal numbers and values is expected.

Out of the 100 private equity executives surveyed, 85% said they expected to see a fall in deal values over the next 12 months, compared to just 13% of respondents who were asked the same question this time last year.

Similarly, the number of deals closed over the next year is also expected to drop; almost two-thirds of private equity firms anticipate a fall in deal numbers, compared to just 10% at this point in 2007.

David Ascott, head of private equity at Grant Thornton, said investors are being cautious and refraining from exiting their current investments until economic conditions pick up, in order to ensure a good return.

“The stubbornly cautious sentiment in the market reflects the fact that there have been many private equity deals caught out due to the credit crunch and rapidly changing economic situation, as business values have dropped and certain sectors face an tumultuous short term outlook,” he said.

For those businesses which are already private-equity backed, the outlook is more optimistic. More than 80% of private equity executives expect the companies they have invested in to grow over the next year. More than one third predict major growth.

Ascott added: "Most private equity firms have the ability to take a longer term view, offering the ability to consolidate business portfolios and focus on fundamentals rather than having to push through the sale of a company in a given timeframe. It is hard to make the charge of asset strippers stick when you consider the long term position most PE houses are now taking."