Private equity has been in a lot of headlines lately … and many of those for the wrong reasons. Mitt Romney, a private equity success story, has brought unprecedented attention to the industry, amid political and public calls for sweeping changes to the tax treatment of their earnings; in an economic climate that has already hurt many private equity firms. In spite of all the negative press, a recent survey by CFO.com, along with Rothstein Kass, has revealed a positive outlook from those in the business; at least according to their survey responses.

In the simplest terms, a private equity group is an investment firm that takes equity positions in private companies, and as such should be judged on return on investment. In terms of performance, more than half reported positive performance since the previous reporting period, with the average expected return on investment for 2011 of 17% when the final numbers come in. That is significantly higher than many other commentators suggest and would be a remarkable investment performance for the asset class.

The survey respondents also have strong expectations for the next two years, with expectations of 18% returns in 2012 and 22% returns in 2013. While there are some credibility issues with relying upon a survey of private equity insiders for their historical performance and outlook, private equity is largely unregulated and as such, financial reporting is voluntary. As a result, consistent, credible and clear data is hard to find. However, it is still useful to track the trends in their reported outlook, and this report does at least show confidence among industry insiders.

Hot industry sectors

In terms of industry outlook, respondents suggested the hotter sectors include industrials, healthcare, banking and finance, which makes sense to us, as we’re also seeing particular interest in industrials and related businesses from manufacturing and distribution to industrial services companies.

Headwinds for Private Equity in 2012

Here are a few headlines of potential headwinds for private equity in the next year or so:

• Tax treatment of carried-interest profits made by private equity firms.
• Fee pressure from limited partners, who want more for less.
• Increasing government regulation, which would likely make it harder to close deals.
• Additional compliance and legal personnel related to additional regulations.
• New disclosure requirements (Dodd-Frank requirement to register as an investment advisor).

While the public would not have much sympathy for private equity investors, it is worth considering the unintended consequences for business owners of a shrinking private equity industry. While most businesses won’t have private equity funds within their capital structure, capital liquidity for businesses is all linked together and capital from private equity certainly increases liquidity and competition among capital sources, as well as increases demand for the acquisition of mid-sized private companies.

As with any other industry that is vilified by the public and the press, some of the negative commentary is merited, but much is hype and hyperbole for a tool that can be very useful for private business, which remains the growth engine of the US. Losing the formal structure of private equity as it exists today, would undoubtedly be a negative for the US economy, so let’s hope the government is able to take sensible steps in their implementation of changes.