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The industry has revealed its most pessimistic transaction outlook in at least five years, according to the latest Grant Thornton Private Equity Barometer.

In the quarterly survey of 100 private equity executives, 85 per cent predicted deal values would fall over the coming year, up from just 13 per cent who foresaw deal values falling at the same time last year, and 69 per cent in Q1 2008.

Wait and see 

The number of deals being completed in the coming 12 months was also predicted to fall, with 64 per cent of PE houses foreseeing a drop, compared with just 10 per cent in Q2 2007, and 33 per cent last quarter.

It is the most pessimistic deal sentiment expressed by the industry since the survey began in 2003.

David Ascott, head of private equity at Grant Thornton, said 'wait and see' was now the order of the day, as private equity firms held tight for better economic conditions, in order to exit with returns approaching those envisioned when investing initially.

"The stubbornly cautious sentiment in the market reflects the fact that there have been many PE deals caught out due to the credit crunch and rapidly changing economic situation, as business values have dropped and certain sectors face an tumultuous short term outlook,” he added.

Own portfolio companies expected to grow 

Ascott said that we are beginning to see a significant adjustment. Private equity houses may now look to acquire at lower multiples, while still targeting risk-adjusted returns.

“It is the companies that were bought just before the credit crunch started to bite, however, that are most likely to be causing some pain. These are the deals forcing the lack of movement," Ascott continued.

The news was better for private equity-owned companies, however, as 84 per cent of PE executives expect their own portfolio companies to grow in the coming 12 months, including 37 per cent that foresee major growth.

Those working for private equity owned companies can also breath a sigh of relief, with just two per cent surveyed planning to make portfolio company redundancies. In fact 59 per cent actively planned to increase staff levels.

Ascott explained that most private equity firms have the ability to take a longer term view, offering the ability to consolidate business portfolios and focus on fundamentals rather than having to push through the sale of a company in a given timeframe.

“It is hard to make the charge of asset strippers stick when you consider the long term position most PE houses are now taking,” he added.

Business services 

Caution is set to last for some time yet, with the majority of executives now expecting the effects of the credit crunch to continue for at least another year; 60 per cent said the crunch would last another 12 - 24 months, while 9 per cent expected it to last even longer.

The sector set for the most interest from private equity over the next 12 months is business services, particularly facilities management, with 55 per cent of executives surveyed saying they would be likely invest in this area.

Second was perennial favourite healthcare, with 39 per cent of PE executives looking at opportunities in the sector, followed by financial services with interest from 21 per cent of PE houses.

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Related links 

• Grant Thornton