SPring 2012 www.BDO.

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ExEcutivE Summary

BDO USA, LLPS PrivAte eqUity PrActice

Strategically focused and remarkably responsive, the experienced, multidisciplinary partners and directors of BDOs Private Equity practice provide value-added assurance, tax and consulting services for all aspects of a funds cycle, wherever private equity firms are investing.

cOntAct:
Scott cacurak, San Francisco 415-490-3232 / scacurak@bdo.com

PrivAte eqUity PrOfeSSiOnALS exPreSS cAUtiOUS OPtimiSm ABOUt tHe yeAr AHeAD
generAL PArtnerS exPect mOre DeAL fLOw, An eASier fUnDrAiSing envirOnment & imPrOvementS in POrtfOLiO cOmPAny PerfOrmAnce

alfred cepero, Miami 305-381-8000 / acepero@bdo.com Wayne corini, Washington, D.C. 301-634-4910 / wcorini@bdo.com Jerry dentinger, Chicago 312-239-9191 / jdentinger@bdo.com lee duran, San Diego 858-431-3410 / lduran@bdo.com ryan guthrie, Costa Mesa 714-668-7385 / rguthrie@bdo.com Scott hendon, Dallas 214-665-0750 / shendon@bdo.com kevin kaden, New York 212-885-7280 / kkaden@bdo.com BoB pearlman, Atlanta 404-979-7124 / bpearlman@bdo.com matt Segal, Chicago 312-616-4630 / msegal@bdo.com

rivate equity professionals entered into 2011 with high hopes for the year ahead. in 2010, as economic conditions improved, general partners saw an uptick in deal flow, leverage return to the markets and portfolio values increase. However, the momentum seen during the first half of 2011 proved to be fragile. During the second half of the year, private equity experienced a slowdown: the typical summer lull in activity extended well into the winter, as uncertainty in Washington and Europe continued to impact the global economy.

From October through December 2011, the Private Equity Practice at BDO uSa, LLP conducted its third annual PErspective

Private Equity Study to take the pulse of the industry and identify key issues that will impact private equity in the year ahead. this years study, which examined the opinions of more than 100 senior executives at private equity firms throughout the u.S., found that despite the continued challenges in the financing markets, private equity professionals are confident that the industry is poised for recovery. With more than $400 billion in dry powder ready to invest and 4,000 portfolio companies ready to sell, fund managers are cautiously optimistic that 2012 will bring with it more deal flow, better portfolio company performance and an easier fundraising environment.
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in fact, the majority of private equity fund managers (70 percent) regardless of fund size expect to close two or three deals during the next 12 months. While that may not bring firms close to the level of deal flow seen in boom years, it is an increase from 2011 when nearly half (47 percent) of fund managers reported closing no new deals and another 19 percent reported closing only one new deal. Small funds those with less than $250 million in assets under management were the hardest hit in 2011, with 66 percent reporting they closed no new deals during the year. the moderate level of deal flow reported during the past year reflects the quality of deals, which remained relatively consistent with the quality of deals seen in 2010. nearly half (48 percent) of respondents reported the financial characteristics of the deals seen in 2011 were only moderately better than those seen in 2010, while another 37 percent indicated the quality was the same as those seen during the previous year. When asked the same question at the end of 2010, 21 percent of respondents indicated that the deals seen during that year were much better than those seen in 2009, another 62 percent said they were at least moderately better and only 14 percent indicated deal quality was the same in 2010 as in 2009.

approximately how many new deals did you close during the past 12 months and how many do you predict you will close in the next 12 months? 80% 60% 40% 20% 1% 0-2 new deals 3-5 new deals 4% 4% 2% 9+ new deals 48% 42% 76% 50% Next 12 Months Past 12 Months

6-8 new deals

approximately how much capital did you invest through new deals and add-on acquisitions during the past 12 months and how much do you predict you will invest during the next 12 months? Next 12 Months Past 12 Months 27% 20% 23% 22% 16% 10% 11% 10% 9% 5% 5%
Less than $1M $11-$29M $30-$50M $51-$100M $101-$250M $251-$500M

34%

5%

3%

1% 1%
More than $1B

Private equity fund managers are approaching 2012 with cautious optimism. the last two quarters of 2011 proved to be slow for private equity, but general partners remain confident in their ability to source and close deals as the economy turns around.
lee duran, partner and leader of the Private Equity practice at BDO

$501-$1B

tO inveSt mOre cAPitAL in 2012

Despite fund managers cautious outlook regarding deal flow, respondents to BDOs third annual study are hopeful that they will deploy more capital in the coming year. One fifth (22 percent) of private equity fund managers regardless of fund size expect to deploy $30 million to $50 million of capital through new deals and add-on acquisitions in the coming year and another 16 percent expect to invest $51 million to $100 million. thats compared to only 10 percent and 11 percent of funds that reported investing the same amount, respectively, during the

fUnD mAnAgerS LOOk

Even so, the majority of respondents remain committed to their primary investment strategies. Only 7 percent have asked their limited partners to allow them to change investment strategies to broaden opportunities and only 11 percent stated they will do so during the next 12 months.

previous 12 months. middle market funds those with $250 million to $500 million in aum expect the most significant uptick with almost double the percentage of respondents (88 percent) predicting that they will invest $30 million or more during the next 12 months. thats up from 45 percent who reported investing the same amount during the trailing four quarters. Looking back, the majority of private equity funds (71 percent) directed the most capital toward new deals in 2011. However, there was an uptick in the number of funds reporting that they deployed the most capital toward add-on acquisitions (13 percent in 2011 versus only 6 percent in 2010). When
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asked about the year ahead, 95 percent of respondents indicated that they will seek add-on acquisitions, which is an increase from 88 percent of private equity funds that sought add-on acquisitions during the trailing four quarters.

fUnDS increASe HOLDing PeriODS, fOcUS On SALeS tO StrAtegic BUyerS

at the same time that general partners are expecting more, but limited, deal flow in 2012, they are feeling pressure on the other end of the fund cycle as they look to exit their investments and earn a return for investors. While exit activity remained fairly steady from 2010 to 2011, BDOs third annual study found that private equity professionals are not optimistic about their ability to exit deals in 2012. Despite the significant number of mature portfolio companies in the market, the majority of private equity fund managers (91 percent) indicated that their expected average holding period is longer now than it was 12 months ago. thats up from 70 percent who indicated the same in last years study. the largest percentage of respondents (31 percent) indicated that their expected average holding period is seven-12 months longer, with another 28 percent indicating it is 13-18 months longer. However, an alarming one in five respondents (19 percent) indicated that their expected average holding period is currently more than two years longer than it was at this time last year. When asked how their exit assumptions have changed when compared to 12 months ago, 21 percent reported an increased focus on sales to strategic buyers, 15 percent reported an increased focus on a long-term hold and 7 percent reported an increased focus on sales to financial buyers. Only 2 percent reported an increased focus on iPOs.

said they were receiving new commitments from LPs in 2010 and only 40 percent who said so in 2009. the largest percentage of funds indicated that they are receiving the majority of first-time financial commitments from family offices (55 percent), followed by pension funds (21 percent), international investors (11 percent), endowment funds (9 percent) and insurance companies (4 percent).

reallocating their assets away from alternative investments as the most significant challenge they have faced. another 22 percent and 12 percent, respectively, identified the quantity of private equity funds raising new funds and past funds track record during the recession as the number one challenges.

the significant number of firms that are either currently raising a new fund or planning to do so in the coming year could lead to a marked uptick in fundraising activity in 2012. However, it wont all be smooth sailing. the notable capital overhang of private equity funds is likely to impact commitments in the coming year as investors look for funds cumulative distributions to increase.
ryan guthrie, managing director in the Private Equity practice at BDO Despite the uptick in the number of fund managers receiving new commitments, the majority of respondents acknowledged that they are facing challenges in regards to fundraising. When asked about the current fundraising environment, the largest percentage of respondents (35 percent) identified institutional investors

BLAck, BUt inDiviDUAL cOmPAnieS cOntinUe tO fAce HArD timeS

the majority (67 percent) of private equity professionals surveyed saw the overall value of their entire current portfolio increase in 2011. thats down slightly from 2010 when 70 percent of respondents saw such an increase. However, when it comes to individual portfolio companies, private equity fund managers reported that there are fewer underperforming companies within their portfolio now than one year ago. twenty-one percent of respondents indicated that none of their portfolio companies are performing below forecasts or expectations, which is an increase from 2010 when only 10 percent of respondents reported the same. that said, many companies continue to struggle in the current economy with the largest percentage of respondents (22 percent) indicating that more than 20 percent of their portfolio companies are currently performing below forecasts or expectations.
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OrtfOLiOS Are in tHe P

fUnDrAiSing
While private equity professionals are not expecting an uptick in exit activity in the near future, the majority are planning to raise new funds in 2012. more than three in five (63 percent) respondents regardless of fund size indicated that they are receiving new commitments from LPs. thats up from 56 percent of private equity professionals who

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the stagnant global economy continues to impact funds ability to grow their portfolios. However, strategic fund managers are taking steps now to mitigate losses and ensure they are well-positioned to maximize the return on their investments as the market rebounds.
Scott hendon, partner in the Private Equity practice at BDO

professional staff headcount and another 31 percent reported increasing administrative staff headcount at the operating company level. at the fund level, 44 percent of respondents reported increasing employee count during the past 12 months and 42 percent plan to do so during the next year.

South and central america overtake asia as the area with the greatest opportunity for new investments the largest percentage of respondents (36 percent) believe that, other than north america, South and central america will have the greatest opportunities for new investments during the next 12 months, followed by asia (27 percent). thats a switch from last year when 20 percent and 59 percent saw opportunities in South and central america and asia, respectively. Eighteen percent of respondents identified continental Europe as the area with the greatest opportunity for new investments, followed by the middle East and africa (15 percent) and Eastern Europe, including russia (4 percent). manufacturing attracts investors, followed by healthcare Private equity professionals continue to see the greatest opportunities for new investments in the next 12 months in the manufacturing (28 percent) and healthcare and biotech (21 percent) industries. However, thats down slightly from last year when 37 percent and 23 percent of respondents saw the greatest opportunities for new investments in manufacturing and healthcare respectively. thirteen percent of respondents

other major findings from the BDO PErspective Private Equity Study include:
fund managers expect leverage ratios, cost of capital to rise Of respondents who used leverage in their last deal, 39 percent indicated that 41 to 60 percent of the deal value was debt. Looking at the debt ratio of their next deal, 48 percent expect 41 to 60 percent to be debt. Similarly, there was a drop in the percentage of respondents not planning to use debt at all in their next deal. While 18 percent of respondents indicated that they did not use leverage in their last deal, only 9 percent are not planning to use leverage in their next deal. When it comes to capital, the largest percentage of respondents (45 percent) expects the cost of capital to increase by up to 200 basis points during the next 12 months given the recent discussions regarding the u.S. and global deficits.

tO mitigAte LOSSeS; BAnkrUPtcieS DecLine

in response, the majority of private equity professionals are taking steps to improve the bottom line at their portfolio companies, a trend that has been consistent during the past three years. Sixty-one percent of respondents to BDOs third annual study have reduced headcount at portfolio companies performing below forecasts or expectations during the past year; another 62 percent have reduced costs by scaling back, 72 percent have reassessed market strategy, 64 percent have renegotiated debt and 74 percent have monitored cash flow on a weekly basis. Private equity professionals appear confident these efforts will continue to pay off. While 11 percent of respondents reported declaring bankruptcy for one or more portfolio companies during the past 12 months, only 3 percent expect to do so in the coming year.

fUnDS cOntinUe

other than north america, during the next 12 months, which one of the following geographic areas do you think will have the greatest opportunity for new investments?
continental Europe

increASing HeADcOUnt At OPerAting cOmPAny & fUnD LeveL

at the same time, private equity fund managers seem to be hopeful that their portfolio companies will experience growth during the coming year. For the second year in a row, the majority of private equity fund managers (62 percent in 2011 and 63 percent in 2010) reported that they will increase professional staff headcount at the operating company level during the next 12 months. When asked about the past 12 months, 57 percent of respondents reported increasing 27%

fUnDS rePOrt Hiring,

15%

18% 4%

Eastern Europe, including russia South and central america asia, including Southeast asia middle East and africa

36%

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in which one of the following sectors did you see the greatest opportunities for new investments during the past 12 months and in which sectors do you expect to see the greatest opportunities during the next 12 months? 37% 28% 6% 6% 11% 10% 11% 13% 23% 21% 9% 8% 4% 5% 0% 9%

Manufacturing Retail and Distribution Technology Natural Resources, Energy and other Commodities Healthcare and Biotech Financial Services Media/Information Other

Fund managers are increasingly focused on creating value by improving operational efficiencies at their portfolio companies to ultimately generate returns for their investors. Ensuring the right management team is in place to run the company is critical to driving performance.
tim mohr, partner in the Private Equity practice at BDO consulting

Past 12 Months Next 12 Months

expect the greatest opportunities to be in natural resources and energy, followed by technology (10 percent), financial services (9 percent) and retail and distribution (6 percent). Only 5 percent of respondents believe there are opportunities in media/ information during the coming year.

Eighteen percent reported their fund is not yet compliant, but in the process of implementing the new requirements using internal staff, and another 17 percent indicated they are using an outside service provider. nearly one in 10 (8 percent) indicated their fund is not at all compliant and they have not yet started implementing the new requirements. fund managers focus on strength of management at new portfolio companies the largest percentage of respondents (46 percent) reported that they supplement the existing management team at new portfolio companies with new members and another 40 percent said they either supplement or replace management, depending on the situation. a majority of respondents (74 percent) indicated that, when they keep members of the existing management team at a new portfolio company, they always perform background checks.

the Bdo uSa, llp perSpective private equity Study is a national survey conducted by PitchBook, an independent and impartial research firm dedicated to providing premium data, news and analysis to the private equity industry. more than 100 senior executives at private equity firms throughout the u.S. with $10 million to $72 billion in assets under management responded to BDOs latest study, which was conducted from October through December 2011. aBout Bdo uSa BDO is the brand name for BDO uSa, LLP, a u.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. the firm serves clients through more than 40 offices and more than 400 independent alliance firm locations nationwide. as an independent member Firm of BDO international Limited, BDO serves multinational clients through a global network of 1,118 offices in 135 countries. BDO uSa, LLP, a Delaware limited liability partnership, is the u.S. member of BDO international Limited, a uK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO member Firms. For more information, please visit: www.bdo.com. material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firms individual needs. 2012 BDO uSa, LLP. all rights reserved. www.bdo.com

the u.S. manufacturing industry worked to increase efficiencies and control costs during the recession. as a result, u.S. manufacturing companies are now well-positioned for growth, making it an attractive industry for private equity investors in the coming year.
fred roZelle, partner in the manufacturing practice at BDO funds work to comply with Sec regulations When thinking about the new SEc registration requirements included in the Private Fund investment advisers registration act of 2010, the largest percentage of fund managers affected by the regulation (20 percent) indicated their fund is fully compliant.

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