Ask any private equity professional what they have been doing since the credit crunch struck and you will probably get the same answer: “I’m spending more time with my portfolio companies.”

This may sound like the industry’s equivalent of politicians leaving their ministerial position to spend more time with the families, but a survey of more than 200 private equity professionals by the Economist Intelligence Unit (EIU) and Celerant Consulting indicates that the sector takes such a pessimistic view of its own medium-term prospects that there may be little option.

“There is an emerging consensus among economists that the duration of the current credit squeeze will extend [for] years rather than months. The adjustments required throughout the financial services industry are widely seen as dramatic and complex – and will require time to implement,” according to the EIU.

The private equity industry, it seems, agrees with the gloomy sentiment. An overwhelming majority of respondents to the EIU survey (73 per cent) said that they expected no recovery in private equity business levels before the first half of 2010.

David Axion, Celerant’s head of private equity and M&A, says that concentrating on the portfolio is not simply the equivalent of spending more time with the family – it is key to keeping the confidence of lenders. “The banks are going to start repaying debt to the Government before they start to lend again and that will have a negative impact on the sector. And when they start to lend, they are only going to lend to private equity houses that have looked after their portfolio companies.”

With the days of cheap debt gone, buyout houses have been forced to rethink their strategies. The EIU found that 66 per cent of sponsors believe that the best thing is to do nothing at all. “Almost all industry executives expect that there will be far fewer deals over the next year and that these will be of considerably less value than previously. The boom years were characterised by ‘too much money chasing too few good ideas,’ ” the EIU says. “In a downturn, by contrast, even worthy ideas find it hard to obtain financial backing. Until the recovery does occur, most private equity professionals expect to be more conservative with both the value and the volume of their deal flow.”

The survey found that 32 per cent of sponsors are even considering returning money to investors – a previously unthinkable tactic.

To do any deals at all, sponsors will have to be a little bit more adventurous, but there are signs they are willing to be creative. “A signficant minority of surveyed firms display an appetite for adventure – even assuming a reduced number of deals,” the EIU said. More than 40 per cent of respondents said that they would venture outside their comfort zone in terms of sector, geography or size range. Healthcare was the most attractive sector because of its strong growth prospects, even in a downturn. Several private equity businesses, including Permira, have hired healthcare teams recently, reflecting the industry’s appetite for deals in the sector.

IT and telecoms deals also remain attractive. The EIU believes that this reflects an expectation that web-based services will continue to be developed irrespective of the downturn and that telecoms network upgrade plans will be revived after the recession. Yet private equity firms will find much greater competition for the plum deals. “Wherever they venture, private equity firms can expect tougher competition in landing the more attractive investments from funds with high levels of liquidity,” the EIU predicts.

“Most notable among them are the sovereign wealth funds. With billions of dollars of liquidity, time to spare and the widest latitude for deploying their capital, sovereign wealth funds have emerged as the top competitor to the private equity sector, according to 32 per cent of survey respondents.”

So when will things start to get better for the buyout kings? Not soon, private equity professionals say. “For the private equity industry, the coming months and years are likely to be one of retrenchment, rather than the fundamental restructuring that awaits the banking sector. Many – though far from all – private equity firms retain hefty reserves of cash, but tighter and more expensive access to credit will hamper deal-making across most sectors,” the EIU found.

Mr Axion believes that the days when private equity spent billions of pounds buying the world’s biggest companies will never return: “My personal view is that the sector will never go back to the levels of huge buyouts. There will be a redefinition of the size of deals – maybe £500 million will be a big buyout when things level out.”

So could there be a chink of light in all the gloom? “A renewed focus on maximising the value of investments through better management may prove the silver lining in a cloud that is enveloping equity industry,” the EIU says. All that time spent with portfolio companies could be worth it, then.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive