Private equity firms are more bullish about investment opportunities in 2012 than they were in 2011, but they don’t expect a surge in capital raising this year.
A 28-page study, released this week by professional services firm Rothstein Kass, found that 77 percent of 293 private equity firms polled believed there would be more attractive investment opportunities this year than last.
“The general feeling is that things are picking up and therefore there will be better buying opportunities,” said Tom Angell, principal in charge of the Rothstein Kass private equity practice.
But pulling the trigger on those investments will still be tough. A surge in competition from public pensions, institutional investors and strategic buyers is likely to drive prices up, making those investment targets more expensive to buy.
“You have a lot of funds chasing the same opportunities, so that will drive up the price,” Mr. Angell said. “So they have to determine if the ultimate price will give them the return they’re looking for.”
Indeed, the study found 68 percent of large firms expect prices for acquisitions to increase in 2012, while 54 percent of smaller firms expect higher prices. (Large firms are defined as those having more than $5 billion under management, and small firms have less than $500 million under management.)
The most popular sectors for investment in 2012 are expected to be in health care, energy, technology and manufacturing, the study said.
The pending expiration of the Bush tax cuts and changes to the tax code leading to capital gains tax increases are likely to be big drivers behind the investment opportunities in 2012. Business owners wanting to avoid paying higher capital gains rates are likely to be motivated to sell before the new tax rates kick in on Jan. 1, 2013, the report said.
“They want to push for the deal to get done this year just to be able to save taxes on the deal,” Mr. Angell said.
At the same time, however, firms say they won’t be rushing to start new funds or increase capital-raising. About 30 percent of the firms said they did not expect more funds to start in 2012. Asian funds are the most optimistic on this question, with 71 percent saying there will be more funds started in 2012 than in 2011; About 59 percent of United States firms expect more funds to start.
When it comes to raising capital, more than a quarter of the firms said they did not plan to actively raise capital at all this year. This sentiment reflects concerns about the glut of cash sitting on the sidelines, market uncertainty and longer exit times that firms face.