The 2013 Capital Markets Report released from Pepperdine University's Graziadio School of Business and Management found that 19% of private equity companies plan to invest in the manufacturing sector over next 12 months. Overall, private equity investors said that they expect further increases in demand for private equity, deal multiples, value of portfolio companies and slightly improving business conditions (see also Pepperdine Universitys Graziadio School of Business and Management).
Based on a survey of 1,613 lenders, investors and business owners, the report is the latest edition in an annual release from the Pepperdine Private Capital Markets Project, examining capital trends and condition across ten segments. Download at: http://bschool.pepperdine.edu/privatecapital "Private equity investment in manufacturing companies will infuse capital into a sector that has huge potential to create jobs and has been one of the areas of economic strength," said Dr. John Paglia, director of the Pepperdine Private Capital Markets Project and associate professor of finance at Pepperdine University's Graziadio School of Business and Management. "The interest from private equity in manufacturing is driven by the rebound in the U.S. auto industry and optimism in the housing sector. All in all, it is a positive signal that a large and important lending segment is favorably looking ahead at a more robust economy."
The Pepperdine Private Capital Markets Project also revealed that of the small businesses who said they plan to hire, skills in sales and marketing are in greatest demand (54%) followed by skilled labor (44%) and service/customer service (34%). Furthermore, 85% of companies planning to hire indicate they would need to train the workers that they hire.
Nearly all of the private capital lenders, investors and business owners surveyed say that domestic economic uncertainty is the biggest issue that private businesses currently face. This differs from the Capital Markets Report released in late 2011 which found that lenders were spilt on whether they thought access to capital or domestic economic uncertainty was the biggest issue facing private businesses. While access to capital remains a concern, the general sentiment is that uncertainty about the future is stifling economic recovery.
"Our nation's economic uncertainty - due to factors such as an unpredictable post-election political environment, mixed economic indicators and the fiscal cliff - is taking an enormous toll on private capital lenders, investors and businesses," continued Dr. Paglia. "Without certainty both lenders and businesses cannot plan for the future. Our economic recovery is dependent on many factors, but one essential element is providing the private capital markets with a sense of stability and an assurance that taxes and regulations are not going to change mid-game." Other key findings include: Half of private capital lenders and privately-held businesses are very concerned about the upcoming fiscal cliff, the economic slowdown that is predicted to occur at the beginning of 2013 when several tax cuts expire.
Investment bankers indicated a general imbalance between companies worthy of financing and capital available for the same. There is a reported shortage of capital for those companies with less than $10 million in EBITDA, but a general surplus for companies with $10 million in EBITDA or more.
The types of businesses that venture capitalists plan to invest in the next 12 months are very diverse with over 33% targeting information technology and another 23% planning to invest in health care or biotech. Approximately 44% of respondents plan to make new investments outside of the U.S.
Angel investors indicated a sharp increase in demand for angel capital, increases in size of angel industry, follow-on investments and time to exit deals. They also reported decreased opportunities to exit, worsened general business conditions, and appetite for risk.
The top three reasons that brokers said that deals do not close are lack of capital to finance (23.5%), valuation gap in pricing (23.2%), and economic uncertainty (18.9%).
Banks who responded to the survey say they expect flat lending capacity of banks, slight increases in underwriting standards, credit quality of borrowers, senior and decreased total leverage multiples, increasing due diligence efforts, and further pricing compression.
A third of the respondents in the limited partner survey reported buyout private equity as being the best risk/return trade-off investment class, followed by distressed private equity at 19%. When asked about which industry currently offers the best risk/return trade-off, 36% of respondents reported information technology, followed by 29% reporting business services.
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