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
LOS ANGELES--(BUSINESS WIRE)--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 &ndash 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
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.”
About the Graziadio School of Business and Management
Founded on the core values of integrity, stewardship, courage, and compassion, Pepperdine University’s Graziadio School of Business and Management (http://bschool.pepperdine.edu/pressroom) has been developing values-centered leaders and advancing responsible business practice since 1969. Our portfolio of fully accredited MBA, Master of Science, and bachelor’s completion business programs provide personalized attention in an intimate setting, emphasis on applied and relevant business practices, and the convenience of five campus locations throughout Southern California. With an alumni network of more than 32,000 business professionals, the Graziadio School delivers superior quality of experience, depth of knowledge and flexibility for professionals continuing their education as full-time students, fully-employed degree recipients and senior executives.
