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Pricing was described as the leading challenge facing private equity firms in 2015 in the sixth annual PErspective Private Equity Study by BDO USA, LLP.
Cited as the leading issue for the second year in a row, 42 percent of fund managers say pricing will be their firms' primary challenge during the next 12 months.
Prices of attractive targets are increasing, in large part because they're harder to find today than a few years ago, according to survey respondents. The identification and quality of targets was second only to pricing, and was cited by 27 percent of fund managers as their top challenge this year.
“With significant competition from both strategic and financial buyers, as well as a lingering capital overhang in the private equity industry in 2015, we don't expect to see valuations level off anytime soon, making it increasingly challenging for funds to identify and execute on the right opportunities at a reasonable price,” said Lee Duran, partner and Private Equity practice leader at BDO, in a statement.
Competition Increasing
Further complicating matters for PE fund managers is the fact that more capital continues to flow into the sector.
Nearly three-quarters (74 percent) of PE fund managers said they're receiving new commitments from limited partners, compared with 61 percent in last year's BDO PE survey.
The majority of first-time financial commitments are coming from family offices (59 percent), pension funds (22 percent) and institutional investors (10 percent). Funds with $500 million to $1 billion in assets under management are the most likely to report receiving the majority of first-time commitments from pension funds (63 percent).
Regulations, Disclosures Grow
Fund managers say the cost of business is also increasing, with growing demands for regulatory compliance and disclosures to investors.
In response to SEC efforts to enhance expense and fee oversight, PE firms are tightening up shop by enhancing internal controls (cited by 57 percent of respondents) and corporate governance. More than one in three (39 percent) are increasing fee-related communications and disclosures to LPs, and quarter are updating limited partnership agreements to provide additional free-related information.
On the regulatory front, 40 percent cite Dodd-Frank compliance as having most significant effects on their fund, followed by 24 percent who cited the Affordable Care Act.
Nearly half of the respondents (46 percent) report having a dedicated chief compliance officer at their firm, with another 7 percent planning to hire one in the next 12 months. Most firms (74 percent) intend to keep compliance staffing levels even with last year.
The study reviewed the opinions of more than 125 senior executives at U.S.-based private equity firms in November and December of 2014.