Private Equity Hunkers Down

That great engine of the 2002-2007 M&A boom, the private equity industry, has been chugging along fitfully these last eighteen months. And it may be as long again until it's back to full throttle, according to a survey of more than 200 senior execs at PE firms in North America and Europe by the Economist Intelligence Unit. Nearly three-quarters of respondents said they don't expect the market to recover fully before the first half of 2010.

And that might be an optimistic estimate, says Bill Hendrickson, executive vice president with Celerant Consulting, which sponsored the research. With the flow of credit for deal-making slowed to a trickle, Hendrickson thinks the slump might extend another three years.

The next twelve months will see some continued retrenchment in deal-making, most respondents believe. More than half expect the volume of deals to decline significantly (by 10 percent or more), and another 25 percent expect a smaller decrease. More than 80 percent expect the total value of PE deals to decrease.

Firms will likely shift their attention from building their portfolios to extracting more value from the assets they already have in place, the study notes. "The managing partners in the PE firms are going to be a lot more involved than they ever were before with the local portfolio company management," says Hendrickson. "They'll want to make sure that the company actually has a strategy and a plan, and that it's working the plan to accelerate improvements."

And that's probably a good thing, he adds. PE firms don't always have as many key performance indicators around operations as they should.

While 41 percent of the surveyed execs reported that they won't be changing their approach because they always engage closely with the management of their portfolio firms, 33 percent said that they plan to take a more hands-on approach. And many firms intend to beef up their operational expertise internally. Operational specialists top the list of expected hires for next year.

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