Study: Private equity possesses $1tr in purchasing power(2)

The private equity industry remains nimble and active despite changes in market cycles and drops in deal volume and leveraged lending, two separate reports by global transaction advisory groups have found.

“We’re seeing transactions now with increased equity components compared to what it was in 2006 and 2007. But even with increased equity and less debt [factored into transactions], the purchasing power that private equity has is well over $1 trillion,” John O’Neill, Ernst & Young’s Americas director of private equity, told PEO.

“Private equity is alive and well and it’s here to stay,” he added. “Its business is robust, its amount of funds to invest is huge.”

The way in which mega-funds, particularly, are being invested, however, as well as private equity’s competitive edge, has changed along with market characteristics.

Because cheap debt is no longer as readily available, O’Neill said, “Corporates are back in the game and they’ve got plenty of cash, and they can, in a synergistic transaction, outbid private equity.”

Hot sectors such as infrastructure, financial services, real estate, energy and telecom continue to attract private equity bidders, as do emerging markets where transactions are typically smaller, minority stakes purchased with little to no debt, found Ernst & Young’s mid-year M&A Recap/Outlook. Meanwhile, it found the middle market to be experiencing less turbulence than larger funds.

Similar findings were released today in PricewaterhouseCoopers’ mid-year forecast.

“Because large deals, which had been private equity’s sweet spot, are not getting done due to the contracted lending environment, many private equity firms have returned to their roots and are buying distressed and other assets,” Greg Peterson, a partner with PricewaterhouseCoopers’ Transaction Services group, said in a statement.

The report tagged financial services, automotive, energy, consumer products and technology as sectors fueling private equity opportunities.

“Acquisitions done in challenging times such as these consistently rank at the top of transactions with the best returns,” Bob Filek, another partner with PricewaterhouseCoopers' Transaction Services group, said in a statement. He added, however, that firms must employ rigorous due diligence given current credit and economic “uncertainty”.