CHICAGO – (June 30, 2009) – Faced with a difficult economy and an anemic dealmaking environment, private equity firms are reducing employee headcounts, strengthening working-capital management, freezing salaries, improving business processes and reducing capital spending in an intensive effort to improve portfolio company performance, according to a recent survey conducted by RSM McGladrey, one of the nation’s leading accounting, tax and business consulting firms.
Survey respondents ranked a weak economy, the ability to meet business forecasts, and the potential for defaults on loan covenants as their primary concerns for 2009.
The survey was conducted by RSM McGladrey and its global investment business, McGladrey Capital Markets. RSM McGladrey, together with CPA firm McGladrey & Pullen, is the nation’s fifth largest accounting, tax and business consulting firm serving approximately 1,500 private equity and portfolio company clients. The firms surveyed almost 100 senior-level PE firm executives representing a cross-section of fund types, including buyout funds (74 percent), mezzanine funds (13 percent) and venture funds (12 percent). Fund sizes ranged from less than $100 million in assets to more than $3 billion.
Almost nine out of ten (88 percent) survey respondents said they have implemented workforce reductions in response to the current economic environment, while another 10 percent are actively considering such actions. Significant majorities are also focusing on working-capital management (83 percent), salary freezes (75 percent), business process improvements (71 percent) and reductions in capital spending (68 percent). Conversely, relatively few have sought to consolidate vendors or coordinate employee benefits across portfolio companies (16 percent and 14 percent, respectively).
Private equity executives seeking to enhance portfolio company performance and value are concentrating on corporate strategy, operations and cash management. Legal matters, information technology and purchasing are receiving less focus.
“Private equity firms are increasing communications and becoming even more engaged in the oversight of their portfolio companies,” said Bob Jensen, RSM McGladrey partner and managing director. “Much of their focus is on helping portfolio companies acquire new customers, increase business with existing customers and enhance existing products and services.”
While most of the funds represented in the survey completed two or three transactions in both 2007 and 2008, more than half have yet to close a deal in 2009. In addition, fewer than 20 percent expect to sell a portfolio company, division or product line this year. The two most difficult issues respondents expect to encounter in closing deals in 2009 are “raising capital or acquisition debt financing” (57 percent) and “decreasing values of acquisition targets due to declining performance” (25 percent).
“The survey confirmed what private equity executives have been telling us privately: their attention has largely shifted from acquiring new platform companies to managing the profitability of existing investments,” said Hector J. Cuellar, president of McGladrey Capital Markets. “This is unlikely to change until the economic outlook improves and acquisition financing becomes more readily available.”
The online survey was conducted from March 13 to April 3, 2009. For more information, please see:
Executive Summary
2009 Managing Portfolio Investments Full Survey
About RSM McGladrey
RSM McGladrey is a leading professional services firm providing accounting, tax and business consulting. RSM McGladrey operates in an alternative practice structure with McGladrey & Pullen LLP, a partner-owned CPA firm that delivers audit and attest services. Through separate and independent legal entities, they work together to serve clients’ business needs. Together, the companies rank as the fifth largest U.S. provider of accounting, tax and business consulting services (source: Accounting Today), with 8,000 professionals and associates in nearly 100 offices. RSM McGladrey Inc. and McGladrey & Pullen LLP are member firms of RSM International, an affiliation of independent accounting and consulting firms. RSM McGladrey is the official accounting, tax and business consulting firm of The PGA of America.
About McGladrey Capital Markets
McGladrey Capital Markets LLC (www.mcgladreycm.com) is a global provider of investment banking services to private and public companies with annual revenues of up to $1 billion. The firm’s services include mergers, acquisitions, divestitures, recapitalizations, capital raising, fairness opinions and restructurings. McGladrey Capital Markets, which offers in-depth expertise in 13 distinct industry sectors, brings together companies, capital and creativity on a national and international scale to help clients achieve their personal and strategic objectives.
McGladrey Capital Markets is also a member of RSM International, a worldwide network of professional services firms. McGladrey Capital Markets’ international headquarters are located in Costa Mesa, Calif. The firm is a member of FINRA.