Private equity activity leveled off in 2015, and industry leaders in a new study generally expect to replicate the same investment levels and priorities in 2016, according to a study by BDO USA.
Ninety-five percent of firms surveyed said they planned to close five or fewer deals within the coming year, compared with 87% of respondents in last year's survey who said they would close no more than five deals.
In addition, respondents said they would deploy their capital more conservatively, with 93% of managers expecting to invest $250 million or less in the coming year, up from 88% in 2015.
Some 66% of firms highlighted investments in new platform deals (acquiring a company in an entirely new industry) as their chief deployment of capital, compared with 67% in 2015.
Private equity leaders are also looking at the same challenges they faced in 2015, with pricing again at the top of the list, cited by more than a third of firms surveyed.
At the same time, 64% of fund managers said gaps between buyer and seller pricing expectations were their top obstacle to closing deals, up from 48% in 2015. BDO noted that many sellers may still be trying to command high prices as they have done in recent years, despite economic realities beginning to favor buyers.
"After the successes private equity experienced in 2014, market unevenness and a sluggish deal landscape led to a plateau in 2015, Lee Duran, a partner and private equity practice leader at BDO, said in a statement.
"As we kick off 2016, fund managers are being prudent about deploying their dry powder as they wait to see how the economy continues to recover and consider industry shake-out of weaker players."
Despite fund managers' conservative 2016 planning, the study found that 70% of respondents still felt optimistic about the investment environment for the year ahead, up from 56% in 2015.
Forty-one percent of respondents believed that private equity raises would be a primary factor in driving deal flow, while 43% cited private company capital raises and sales.
The study's findings were based on a survey conducted by PitchBook in the fourth quarter of some 140 senior executives at private equity firms in the U.S. and western Europe.
Valuations and Opportunities
Like last year, some two-thirds of fund managers said the technology and health care/biotech sectors were the industries most likely to experience rising valuations in 2016.
In contrast, 59% of those surveyed deemed the retail and distribution sector the most likely to see declining valuations as growth in the industry continues to stagnate and consumer confidence remains volatile.
Nearly one-third of survey participants said the manufacturing sector would generate the greatest opportunity for investment in the next 12 months, even though the U.S. manufacturing sector has suffered from lagging exports owing to a strong U.S. dollar and weak demand for durable goods.
"Manufacturers are taking advantage of current conditions to set themselves up for future success," BDO Capital Advisors managing director Dan Shea said in the statement.
