Private Equity in 2010 – An Optimistic Outlook

2010-growth-chartNow that we’re settling into a new decade, more and more business owners are looking at whether to sell their business now, or to wait and see what the economy might do. Recently I read an Ernst & Young report on the state of private equity as the economy continues its recovery from the recession, and the outlook is positive.

According to the report, private equity firms are poised to play a strong role in economic recovery. Private equity currently has substantial available capital (estimated at $500 billion to $1 trillion), as well as the ability to be flexible and innovative in deploying capital. Out of 69 IPOs in November of 2009, 11 were private equity-backed, valued at $3.4 Billion. Compare this to the 4th quarter of 2008, when 10 PE sponsored deals raised only $910 Million, quite a difference in growth rate.

A Reuters report on last month’s World Economic Forum indicated that leading private equity firms are expressing optimism about sales and acquisitions in 2010. More deals and larger deals are being made, and the valuations for PE holdings has risen for the past four consecutive quarters. The credit markets have opened up for small and medium-sized deals, and IPOs are possible now that the stock market is recovering.

Henry Kravis, co-founder of Kohlberg Kravis Roberts & Co, commented optimistically on this year’s prospects for private equity deals. “Clearly markets have opened up, the debt markets are open right now, the bank loan markets are just opening, spreads have come down tremendously, so your cost of capital comes down. And the equity markets are open so it now makes it possible for companies acquired in the last years to go public,” he said.

It’s significant to note that private equity investments grew faster than private sector investments in the year following the end of three of the last four recessions. Stephen Schwarzman, CEO of the Blackstone Group, was quoted by Reuters as saying that historically, returns on investments made before full recovery are “double or triple what they were at the top of the economic cycle.” Private equity firms know this, and are looking to invest right now.

Although the statistics above are for the larger private equity market, the same metrics apply to the segment of private equity groups that invest in smaller mid-market companies. We are getting calls every day from PEGs seeking to make investments in smaller companies. This hasn’t happened in many years. This is good news for business owners of mid-size companies who are thinking of selling their business.

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About Gary T. Brooks

Gary T. Brooks has over 27 years of experience in the investment banking industry and has been involved in over 100 transactions. He is currently the CEO of ExitPlanPros, where he helps business owners grow their business while planning their exit.

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