Private equity managers are feeling confident about returns and deal opportunities for the rest of this year, according to a new survey of the industry.

The recovering economy was seen as a key factor for the positive outlook, with 14 per cent of private equity firms expecting more entrepreneurs to be looking for capital, and 28 per cent expecting to see pent-up demand unleashed.

The group of 215 private equity firms surveyed by Rothstein Kass found that 80 per cent are targeting double-digit returns for this year, with only 8 per cent expecting returns below 10 per cent.

While this is good news, the majority of the industry (77 per cent) expects to see a lot of competition for deals, with institutional investors increasingly investing directly in private equity. A majority (80 per cent) also expects to see a rise in strategic buyers this year.

“Co-investment will no doubt increase in the months and years to come, creating both upside and downside for general partners and investors,” said Tom Angell, principal-in-charge of Rothstein Kass’ Private Equity Practice.

“Many funds see co-investment opportunities as an inducement to encourage future investment, which may or may not materialize. Alternatively many investors look at co-investment as a way to escape fees and gain control over investments, but may have unrealistic expectations about the level of time and effort involved. Certainly, these factors must be balanced within the industry.”

Forces working against private equity

Despite positive sentiment, private equity firms are also facing challenges, said Rothstein Kass. Firstly, some of them (around 5 per cent) face an “invest or lose it” situation, where their investment horizons are expiring with un-invested cash on their balance sheets. A further 10 per cent of the firms polled expect to face this situation in the near future.

“These funds will have to make a decision between what may be viewed as less-than-optimal investments and returning capital to their investors,” Rothstein Kass said. “While dry powder has decreased somewhat since its peak in 2007, there is still a glut of money on the sidelines, and deal flow would have to increase dramatically and rapidly to absorb these assets.”

Fewer funds will be on the capital-raising trail this year than last, with roughly half of firms saying they won’t be fundraising this year.

Ongoing regulatory pressures are also prompting many firms to employ outside consultants, with around 79 per cent of firms saying they expect private equity firms to get more frequent external help navigating the complex regulatory environment. More than two-thirds of firms polled believe there will be increased federal taxes on carried interest and 80 per cent expect to see more downward pressure on fees.

Meanwhile, the involvement of women and minorities in the private equity industry remains low, said Rothstein Kass, with over half of firms saying these groups have no representation at general partner level.