BDO United States

Chicago, IL – November 9, 2009 – According to a new study by BDO Seidman, LLP, one of the nation’s leading accounting and consulting firms, two-thirds (67%) of private equity executives surveyed expect the government’s new tax proposal on carried interest to pass. Private equity executives report that the passage of the proposal, which would raise the tax on carried interest from the current 15% capital gains rate to 39% starting in 2011, will reduce the ability of funds to attract and retain top talent (43%), dilute the competitive position of US-based private equity firms (35%) and create additional administrative burdens (22%).

When it comes to the current administration’s proposals to regulate the private equity and alternative investment industries, 55% of PE executives believe that increased regulation will constrain the ability of certain funds and/or firms to do business, and that regulation will require cost and time that the industry cannot currently afford (26%).

“Recent actions by the House Financial Services Committee suggest that fundamental changes to the PE industry are afoot. While 39% of private equity executives say their primary concern in the next year is the availability of leverage, 12% say they’re most concerned by these regulatory changes,” said Scott Hendon, Partner with BDO Seidman’s Private Equity Practice Group. “Moving forward, it will be critical for funds to understand the impact that regulatory changes may have on their businesses in preparation for possible implementation in 2011.”

Funds Still Being Raised, Despite Extending Exit Timelines

In response to market conditions, eight in ten (82%) PE executives report that they are extending average exit timelines. When asked how their exit assumptions have changed, 52% report an increased focus on recapitalizations and holding portfolio companies, 27% report an increased focus on acquisitions and 10% are focusing more on secondary buy-outs. Just 4% are increasing focus on IPOs.

Despite a frosty fundraising environment, four in ten (40%) PE executives report that they are receiving new commitments from LPs. Firms say they’re receiving the majority of first-time financial commitments from pension funds (36%), family offices (29%) and international investors (25%).

“Private equity firms with a proven track record and a solid history continue to be successful in launching new funds, even in the current marketplace” added Hendon.  “That being said, many continue to face challenges in today’s fundraising environment, with 2009 fundraising being significantly below 2007 levels.”

 These findings are from the inaugural BDO Seidman PErspective Private Equity Study, which examined the opinions of nearly 100 senior executives at private equity firms throughout the US. The study, which was conducted from September through October 2009, consisted of telephone interviews with senior level executives at private equity funds ranging from $10 million to more than $1 billion of committed capital.

Other major findings from the BDO Seidman PErspective Private Equity Study include:

• Focus on Earnings/Cash Flow: With historical performance being impacted by economic conditions, and therefore less indicative of future success or failure, 36% of PE funds report that they’re placing a greater emphasis on the quality of earnings and cash flow when it comes to due diligence. One in four (20%) is using their internal team more now than they were in the past to scrutinize the target, and 17% are using specialist resources more now as a result of market turmoil.

• Economic Environment Spurred Losses, Action: According to BDO Seidman’s new study, 44% of PE funds report that the value of their entire portfolio declined 6%-15% from Q3 2008 through Q3 2009, while one quarter (26%) saw declines of 16%-25%. For portfolio companies performing below forecast or expectations, 88% of PE executives report reducing costs by scaling back and 82% continue to monitor cash flow on a weekly basis.

• Bankruptcy Filings Continue:  Despite some signs of growth in the economy, the worst is not yet over for many companies, with one in six (17%) PE executives expecting to declare bankruptcy for one or more portfolio companies in the next 12 months.  “Bankruptcy can be an important vehicle for restructuring a troubled company, and in recent months, we’ve seen many companies use bankruptcy to restructure debt,” said Kevin Kaden, Partner with BDO Seidman’s Private Equity Practice Group focused on Business Restructuring Services.  “In many of these cases, the new debt can provide an otherwise operationally strong company the ability to emerge from bankruptcy with better leverage and a fresh balance sheet.”

The BDO Seidman PErspective Private Equity Study is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to senior private equity executives, using a telephone survey conducted within a sample of private equity funds (ranging from $10 million to more than $1 billion).

About BDO Seidman, LLP

Strategically-focused and remarkably responsive, the experienced, multi-disciplinary partners and directors of BDO Seidman’s Private Equity practice provide value-added assurance, tax and consulting services for all aspects of a fund’s cycle, wherever private equity firms are investing.

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