The survey, which includes responses from 125 private equity firms, shows that more than three-quarters of respondents (77 percent) are optimistic about their own economic conditions, with 20 percent reporting a neutral outlook and only three percent reporting that they were "not optimistic."
"These survey results clearly indicate that private equity firms are regaining confidence," said Don Lipari, national leader – private equity services for McGladrey. "These firms have exited companies they could, held tight to existing portfolios and taken advantage of obvious cost-cutting opportunities. Now, having spent several years cautiously watching for signs of an economic turnaround, they are enthusiastic about growth opportunities in the year ahead."
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Despite growing optimism, the survey does suggest that firms remain cautious about the economic conditions around them, with less than half (48 percent) reporting optimism about the global economy. The cautious sense of optimism about the external economic environment was also apparent when respondents indicated which external factors were having a high impact on their portfolio companies’ performance. While more than half of the respondents indicated that typical factors such as "market conditions" and "energy costs" had a high impact, a relatively small number (16 percent) chose international economic factors. At the same time, a smaller but still considerable number of respondents pointed to policy matters such as regulatory compliance (30 percent), taxes (29 percent) and health care costs (15 percent).
With a potential surge in M&A activity on the horizon, the survey also sheds light on some of the risks and barriers firms must confront while managing their portfolio investments. While respondents reported running into a wide range of issues, the survey revealed a particularly notable – and surprising – series of challenges related to IT infrastructure. Specifically, more than one-third of the respondents indicated that they "always" or "usually" find portfolio companies to have outdated business applications, infrastructure limitations, inadequate business analytics, and inadequate web and e-business capabilities. In each case, the number of respondents who said they "sometimes" encountered these problems was also more than 50 percent.
"While a solid IT infrastructure is widely recognized as a ‘must’ in the corporate world, these survey results indicate that private equity firms have yet to make IT due diligence a ‘must’ when targeting acquisitions," said Dave Noonan, national director – private equity consulting, with McGladrey. "The deficiencies respondents reported finding post-acquisition could interfere with a firm’s ability to execute its plan and result in substantial capital outlay; if combined, they could cripple an investment. That’s why it’s crucial for firms to not only conduct an IT review during the due diligence phase of acquisitions, but that they also review existing investments to plan appropriately for add-ons, carve-outs and exits."
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