Consistent economic improvement won’t occur until 2010 or beyond, according to many private-equity (PE) dealmakers surveyed by the audit, tax and advisory firm KPMG LLP. But when the market turns positive, most respondents expect the energy sector to be most attractive for PE investors, while infrastructure offers long-term appeal.
Some 43% of survey respondents attending a global PE conference in Key Biscayne, Fla., on 28 April said the economy would begin picking up next year, while 39% said it would occur after 2010. Just 7% of respondents expected a broad recovery in mid-2009 and 11% said market could recover before the end of this year.
More than 35% of the 200 PE investors surveyed said energy would be the most appealing sector for PE investment as the economy recovers, with financial services and technology sharing second place (15%), followed by healthcare and business services tied for third (12%).
Longer term, meanwhile, infrastructure investments – highways and sports arenas, as well as public transportation and utilities – were viewed by 40% of respondents as the next “meaningful” investment opportunity for PE. In addition, survey respondents named emerging markets (33%) and public-private partnerships (PPP) assets/financial services (27%) as strong opportunities for PE.
In addition, respondents said the regulatory landscape raised concerns about public-private partnerships. For instance, asked for their largest concern around PPPs and potential investments in distressed bank assets, 46% of the respondents pointed to “look-back legislation and regulation,” and 25% worried about potential public backlash if eventual profits were perceived to be too high.
Meanwhile, 17% said the complexity of asset valuation was their biggest issue, and 13 percent were apprehensive about partnering with a government agency.
“Uncertainty continues to pervade the marketplace,” says Shawn G. Hessing, national managing partner, U.S. Private Equity Group, KPMG. “Our survey findings indicate that market conditions are making it difficult for PE managers to make projections for their portfolio companies. In addition, the PE sector expresses concern about the regulatory and tax landscape, funding commitments and the availability of debt.”
“PE investors by their nature work to anticipate the downside in the market, so I would say those who took this survey are planning for the worst in an elongated cycle and hoping for the best,” continues Hessing. “They want no negative surprises.”
“While infrastructure may not offer the historic PE returns of 25 to 30%, a 15% rate of return on an infrastructure project may appear more acceptable when viewed against the significantly lower returns that have become typical in today’s market. The respondents are concerned that the rules of engagement on public-private partnerships will likely change as the market develops, and the PE sector is seeking more clarity before investing.”
L.D.