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Private Equity Strategies

2012 - A Surprisingly Ok Year For Private Equity

Tuesday, January 22, 2013

By: Bailey McCann, Private Equity Strategies

Despite broad based uncertainty in the US and abroad, 2012 turned out to be a surprisingly positive year for private equity.  Private equity fundraising was up 20% for the year, reaching a total of $160.4bn according to a recent report from Dow Jones Venture - Source.

"Some of the largest firms re-entered the fundraising fray in 2012, which drove up overall volume in the U.S. during the year," said Laura Kreutzer, editor of Dow Jones Private Equity Analyst, in the report. Some of the big name funds you'd expect to see are leading the back including Advent, and Blackstone both of which saw greater fundraising in 2012. Blackstone's stock price also ended the year positively.

Compensation is on the rise too, for the third year in a row, the Private Equity and Venture Capital Compensation Report released by, showed increases in both base pay and bonuses. The average private equity professional earned $273,000, in 2012 according to the report.

Even medium and small sized firms are seeing positive increases in value. The Dow Jones report shows that the size of median US private equity funds increased 24% to $310m in 2012. As Private Equity Strategies noted before, some advisers to institutional investors have said that private equity may be one of the last investments that can hit return targets on a reliable basis. Looking back at the last year, it seems like they may be right. Other alternatives like hedge funds lagged the S&P 500 for much of the year.

Recent private equity interest in both Legg Mason and Dell may also indicate the revival of big buyouts.  Reports surfaced earlier this month that two private equity firms were interested in Legg Mason although nothing more than that has been announced. One analyst says that taking the firm private is unlikely.

Silver Lake Partners was reported to be in talks with Dell over a buyout of that company. If Dell is successful in securing the buyout, current reports speculate that the total could be as high as $20bn a number not seen since the financial crisis.

Even if these deals don't go through, seeing multiple reports like this, coupled with improvements in fundraising, may be early indicators that private equity may be moving back to pre-crisis deal amounts.

Another indicator might be found in the troubled IPO market. After the Facebook IPO many firms took a step back from their IPO plans, however, a report from Ernst&Young says that global IPO activity is likely to pick up in the second half of 2013.

The global accounting firm expects to see an uptick in real estate, oil and gas, and infrastructure in the latter half of the year.

"As expected, there has been lower IPO activity in Asia as the number of state owned enterprises (SOEs) coming to market has diminished. The fourth quarter figures show that the US IPO market is back by deal number and rewarding companies that perform strongly. Europe has significantly increased activity in the fourth quarter, compared to the rest of the year," says Maria Pinelli, Ernst & Young's Global Vice Chair Strategic Growth Markets.

The firm is predicting that the US economy will continue to improve giving more support to the equity markets and improving the environment for IPOs.  If these predictions turn out to be true, coupled with big buyouts and better fundraising private equity may look back at 2012 as the first significant year in the recovery.

A recent survey conducted by AxialMarket of private equity firms shows that many firms are simply waiting for valuations to improve before bringing their companies to market. 58% of those surveyed expected that valuations would improve starting in the first half of 2013, setting up better opportunities to go to market in the second half of the year or early 2014.

Survey data also shows that the amount of debt in deals is also pushing back up to around 7x earnings - a level not seen since before 2008.  But unlike those boom years, the companies with financing this time around appear to be on more solid footing having come through the crisis.

Overall, the data seems to be offering firms and investors some points to be cautiously optimistic about heading into the New Year.  It seems as though the last big hurdle to clear is whether firms have grown more comfortable with uncertainty, which is likely to be the only constant for the next few years.

This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
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