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NEW YORK CITY-Private equity investors, although not foreseeing an economic turnaround until 2010 or later, are betting on the energy sector and infrastructure for the long term, according to a survey conducted by KPMG LLP. Energy topped the list of choices for investment when the market turns positive, while infrastructure was considered the next “meaningful” opportunity by many PE managers.

Shawn Hessing, New York City-based managing partner of KMPG’s US private equity group, says in a release that the survey indicates that “market conditions are making it difficult for PE managers to make projections for their portfolio companies. In addition, the PE sector expresses concern about the regulatory and tax landscape, funding commitments and the availability of debt.”

A KPMG spokesman tells GlobeSt.com that the survey questions did not specifically address the commercial real estate sector. However, real estate figures strongly in a number of issues discussed in the survey.

Those issues include infrastructure investment, which 40% of respondents say will top their list of long-term opportunities. “While infrastructure may not offer the historic PE returns of 25% to 30%, a 15% rate of return on an infrastructure project may appear more acceptable when viewed against the significantly lower returns that have become typical in today’s market,” Hessing says in the release.

Thirty-three percent of survey respondents named emerging markets as a strong PE opportunity, while 27% cited public-private partnerships for assets/financial services, according to KPMG. However, survey respondents said the regulatory landscape raised concerns about PPPs.

For example, 46% cited “look-back legislation and regulation” as their biggest concern related to PPPs and potential investments in distressed bank assets, while 25% worried that there could be public backlash if eventual profits were seen as too high. Another 17% said the complexity of asset valuation was their biggest issue, while 13% had misgivings about partnering with a government agency. Hessing comments that the survey respondents were “concerned that the rules of engagement on public-private partnerships will likely change as the market develops.” As a result, he says, “the PE sector is seeking more clarity before investing.”

More than 35% of the 200 PE investors KPMG surveyed last month said energy would be the most appealing sector for private equity as the economy recovers. Financial services and technology tied for second place with 15% each, followed by healthcare and business services, both of which were cited by 12% of respondents.

As to when that economy will recover, survey respondents tended to be more bearish than the respondents to the National Association of Business Economists, 90% of whom expect the recession to be over by year’s end. In KPMG’s survey–conducted during last month’s SuperReturn conference in Key Biscayne, FL–43% predicted the economy would begin recovering next year, while 39% said it wouldn’t happen until after 2010. Only 18% of respondents said they expect a recovery to happen this year, including 7% who think it could happen by the end of the second quarter.

“PE investors, by their nature, work to anticipate the downside in the market, so I would say those who took this survey are planning for the worst in an elongated cycle and hoping for the best,” Hessing says in a release. “They want no negative surprises.”

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