CHICAGO – Feb. 15, 2017—Last year proved to be a challenging year for the private equity (PE) industry as market instability and political uncertainty took hold worldwide. But 2017 has ushered in a more optimistic outlook, according to BDO’s Eighth Annual PErspective Private Equity Study, a survey of more than 200 fund managers across North America and Western Europe.

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When the initial survey was conducted in October 2016, more than half (56 percent) of fund managers characterized the investment environment as favorable, while 44 percent said it was unfavorable—the highest proportion since 2014. In a follow-up poll conducted in early January, however, the number of fund managers reporting optimism jumped to 71 percent.

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“We believe 2016 served as something of a reset for the private equity industry, which experienced a rocky 2015. But as we look ahead to 2017, there is plenty of reason for optimism. The economy is on the upswing, deal flow is increasing and fund managers are eager to deploy uninvested capital in the year to come,” says Scott Hendon, partner and leader of BDO’s Private Equity practice.

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Underlying this substantial growth in optimism may be easing economic uncertainty across the business landscape. The 2016 General Election cycle—in conjunction with other major developments, including the shockwaves of Brexit, the contraction of the Chinese economy early in the year and continued volatility in commodity prices—created significant market fluctuations throughout the year. In October, 45 percent of fund managers said a transition in the presidential administration was their top global political concern, followed by Brexit (19 percent) and sovereign debt crises (14 percent).

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In the days following the election, however, markets began to stabilize, the Dow increased to record highs and the Bureau of Labor Statistics issued a solid December jobs report. With the election over, PE fund managers appear to be mirroring the optimism reflected in the equity and labor markets.

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“Election years always carry some degree of uncertainty for the PE community, but 2016 was a particularly contentious and volatile year,” adds Dan Shea, managing director with BDO Capital Advisors and a member of BDO’s Private Equity practice. “Still, improving fund manager sentiment likely has less to do with who won the election and more with the fact that it’s over. It’s easier for fund managers to plot their strategy with such a huge unknown out of the mix.”

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These findings are from the BDO PErspective Private Equity Study, a global survey of more than 200 private equity fund managers conducted by PitchBook, an independent and impartial research firm dedicated to providing premium data, news and analysis to the private equity industry.

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

IPOs Poised to Make a Comeback. Reflecting the PE industry’s renewed optimism is improved sentiment toward the IPO market, which experienced a painful 2016. When asked which factor most contributed to 2016’s disappointing IPO environment a plurality (31 percent) point to high volumes of M&A activity, followed by poor IPO performance (28 percent) and a slowing global economy (24 percent). Amid this uncertainty and pessimism, in October, just 4 percent of fund managers surveyed said an IPO was likely to be the most lucrative exit option in 2017. By January, that proportion had doubled to 8 percent, suggesting that the IPO market may be heating up as 2017 gains momentum.

Fund Managers Expect to See Improved Deal Flow Overall. Similar to IPOs, 2016 was a difficult year for overall deal flow. In our 2016 PErspective Study, one-quarter of fund managers anticipated investing $10 to $29 million in new deals and add-on acquisitions; however, this year’s data finds that 26 percent of respondents invested less than $10 million last year. Looking ahead to 2017, though, fund managers are realigning their expectations. Consistent with prior years, the largest proportion of respondents (28 percent) say they plan to close two new platform deals in the coming year, and 25 percent are looking to invest $10 to $29 million once again. When asked about the key drivers of PE deal flow in the coming year, private company sales and capital raises are most frequently cited (33 percent), and PE exits are the second-most-cited at 30 percent.

Fundraising May Taper. This year’s survey marks the least optimistic year for fundraising since 2014, with just 53 percent of fund managers saying they are raising new funds from limited partners. This is down from 64 percent last year, 74 percent in 2015 and 61 percent in 2014. Family offices remain the most common source of funds, with 46 percent of fund managers saying this investor segment provides the majority of their financial commitments. Larger firms ($501M in AUM and up) tend to skew more heavily toward pension funds, which is consistent with last year.

Technology and Energy Sectors Grow Riper for Investment. In 2016, many market analysts expected to see investor appetite for technology companies right-size after years of skyrocketing valuations. Despite some significant sector setbacks—such as the downfall of laboratory testing company Theranos—PE fund managers remain bullish on the industry, with two-thirds expecting to see increased valuations in the year ahead. At the same time, 70 percent expect to see valuations grow in the healthcare and biotech industry in the year ahead. Meanwhile, in a reflection of growing stability in the energy space, 44 percent of fund managers say the natural resources industry will see increasing valuations in the coming year, up from 36 percent last year and 34 percent in 2015.

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