Venture capital lenders expect 42%, private equity groups expect 25%, asset-based lenders expect 11%, mezzanine funds expect 18%, senior lenders expect 6.5% annual return on new investment
Study Also Shows Top Lenders Expect Interest Rates to Climb, U.S. Gross Domestic Product to Be Flat or Decrease in the Next 12 Months and lending and investment to become more restrictive
LOS ANGELES, Calif. (July 28, 2009) – Even in the recession, private capital lenders have very high expectations for return on investment, according to a study released today by Pepperdine University’s Graziadio School of Business and Management. However, the majority of private lenders anticipate continued economic decline in the year ahead will increase demand for private investment and capital will be harder to come by. The Pepperdine Private Capital Markets Study (http://bschool.pepperdine.edu/privatecapital) shows venture capital providers expect 42% and private equity groups expect 25% return on investment. Other key lending segments also expect a high return on investment: asset-based lenders expect 11%, mezzanine funds expect 18%, and bank lenders expect 6.5% return on investment.
The study conducted by Associate Professor of Finance John Paglia, based on interviews with 627 lending and investment professionals, was released today in conjunction with a Los Angeles and California statewide economic forecast that Pepperdine partnered to deliver with Beacon Economics and the Los Angeles Area Chamber of Commerce. The Pepperdine Private Capital Markets Study provides insights into five private market segments – banks, asset-backed, mezzanine, venture capital and private equity. In addition to return on investment, the study also gauged participants’ outlook for each industry segment and if lending would be more or less restrictive.
Of those 5 segments surveyed, 76% believe demand for private capital will increase over the next year, while 55% report that they expect a higher degree of restrictiveness of capital. An average of 60% of mezzanine funds, banks and asset-based lenders believe we will see higher interest rates over the next year. Meanwhile, 55% of all 5 market segments believe that GDP will decline during the next 12 months.
“Professionals who work in lending either for an institution or a specific fund are excellent bellwethers for what’s ahead for other businesses and consumers,” said Paglia. “The upward movement of interest rates that lenders are predicting along with more restrictive terms for obtaining capital will make it even more difficult for businesses on Main Street to survive. However, the upside is most private capital providers expect an upswing in demand for funding.”
Increasing demand for private capital, greater restrictions on lending and investing
- Venture Capital Investors – The vast majority (76%) of venture capitalist providers believe the demand for venture capital will increase over the next 12 months. Sixty-two percent (62%) of survey participants believe that venture capital investing in general will become more restrictive, and 30% report it staying about the same over the next 12 months.
- Private Equity Investors – Over the next 12 months, 64% of those surveyed believe that the demand by companies for private equity will increase. Nearly one-fifth (18.2%) of private equity lenders said they expect an increase in demand. Over the next 12 months, 66% believe that private equity investing in general will become more restrictive, while 27% believe it will stay about the same.
- Mezzanine Lenders – Eighty-six percent (86%) believe that the demand for mezzanine loans will increase over the next 12 months. Sixty-four percent (64%) believe that mezzanine lending will become more restrictive over the next 12 months.
- Bank Lenders – The majority of bank lenders (61%) said that they believe that the demand for loans in general will increase over the next 12 months. Most bank lenders also believe that lending in general will become more restrictive (46%) or stay about the same (39%). In recent months, small business loan failure rates have hit 11.9% and have increased steadily since 2004 when the rate was just 2.4%. Only 15% of those surveyed felt that lending will become less restrictive.
- Asset-Backed Lenders – Almost all asset-backed lenders surveyed (97%) believe that the demand for asset-based loans in general will increase over the next 12 months. Fifty-six percent (56%) believe that asset-based lending in general will stay the same, and 35% believe it will become more restrictive.
Interest Rates Expected to Rise, GDP to Flat or Decrease
Among those segments whose capital is connected to interest rates, lenders expect interest rates to climb in the next year (45% of bank lenders, 62% of asset backed lenders, 64% of mezzanine lenders). Among those asked about U.S. gross domestic product, study participants also said GDP will stay the same or decrease (bank lenders – 40% stay the same and 30% decrease; asset backed – 63% say decrease; private equity investors 58% say decrease). Venture capitalists and asset based lenders are the most pessimistic about the economy as more than 60% of respondents believe GDP will decline. Overall, the study found that median estimates of GDP growth are consistently negative.
The full report, available at http://bschool.pepperdine.edu/privatecapital, also examined the behavior of the private capital market participants, investment types, expected and historical rates of return, financial ratio thresholds, coupon rate distributions and other investment characteristics.
The Pepperdine Private Capital Markets Project is the first comprehensive and simultaneous investigation of the major private capital market segments.
Said Paglia: “Because private business owners have a limited understanding of their true cost of capital, the capital types available to them, and the requirements that must be met in order to raise new capital, business owners are unable to make optimal investment and financing decisions, and determine whether they are creating economic value in their companies. With over 99% of companies having fewer than 500 employees, our economy is dependent upon the success of small businesses. This survey is a critical first step along the path of understanding and increasing the value of private companies and our economy.”