Key insights for PE from EY’s Capital Confidence Barometer
Nearly three-quarters of US executives said that they plan to pursue a deal sometime in the next year, according to our latest Capital Confidence Barometer, a biannual survey of more than 1,600…
Nearly three-quarters of US executives said that they plan to pursue a deal sometime in the next year, according to our latest Capital Confidence Barometer, a biannual survey of more than 1,600 senior executives (422 from the US) from large companies around the world and across industry sectors.
The objective of the Barometer is to understand boardroom priorities over the next twelve months and to gauge corporate confidence in the global and domestic economic outlook. For PE firms, understanding these priorities is critical. US M&A is on track for more than US$2.2t in announced deals in 2015, with corporate acquirors making up the highest percentage of that total since 2001. A challenging environment for organic growth, coupled with an accommodative financing environment is leading many strategic investors to pursue aggressive acquisitions strategies, which has clear implications for the PE industry as it continues to both 1) seek ways to put to work a record US$275b in buyout capital, and 2) continue to exit portfolio companies, including the last of those acquired in the 2006-2007 period.
Key finding from the survey include:
-83% of executives described the global economy as improving, versus just 53% a year ago.
-88% of US executives expect the M&A market to remain stable over the next twelve months; another 10% expect it to improve; just 2% anticipate a decline.
-74% of US executives indicate that they plan to pursue a deal sometime in the next year, the highest number recorded yet by the Barometer.
-Companies in diversified industrial products, consumer products and retail, automotive and transportation, real estate and life sciences are expected to be the most acquisitive over the next 12 months.
-Earnings continue to be the most negative US indicator, as executives remain skeptical of companies’ ability to grow profits amid a persistent low-growth environment. Just 40% described their confidence in corporate earnings as positive. However, 67% of US executives described their outlook for equities valuations as positive.
-Companies are not just executing deals, but planning the next ones; one-deal or two-deal pipelines are converting to threes and fours. 57% of companies surveyed have three or more deals in the pipeline.
-With disruptive megatrends blurring traditional boundaries between sectors, companies are increasingly looking towards cross-sector deals. 93% of companies planning to do an acquisition are planning to do so outside of their own sector.
While the survey paints a picture of continued competition for deals, it also provides for PE some encouraging insights. Portfolio analysis for example, which includes strategic divestments, is moving higher on boards’ agenda thanks in part to ongoing shareholder activism; 32% described this as having increased in importance over the last six months. Moreover, recent volatility in the emerging markets is leading many to step away – more than 80% of US respondents plan to allocate 10% or less of their acquisition capital to emerging markets—down nearly 20 points from six months ago.
The messaging is clear. Confidence amongst US executives continues to increase, and barring any significant macro shocks, corporates will remain active as acquirors well into 2016. As such, the strategies that PE is employing to deploy assets amid a high-valuation environment – opportunistic platform acquisitions, a focus on add-on deals, cross-border activity, minority stakes, and others – will remain an essential part of the playbook in the coming year.
The EY Capital Confidence Barometer is published in the spring and the fall. For the full report, visit http://www.ey.com/US/en/Services/Transactions/EY-capital-confidence-barometer
EY is a Tier 2 Associate Member of the PEGCC.
