The Global Private Equity Market Was Resilient in 2019, Capping the Best Six-Year Stretch on Record at $3.2 Trillion in Disclosed Deal Value

BERLIN, Feb. 24, 2020 /PRNewswire/ -- Despite increasing concerns about deteriorating macro conditions and the threat of a looming recession, the global private equity (PE) market showed signs of great resilience last year. The PE investment market had its strongest six-year stretch in the industry's history with $3.2 trillion in disclosed buyout deal value. Buyout firms attracted a record amount of capital and increased their share to 40 percent of total private capital, the highest on record since 2006. However, there were increased challenges for general partners (GPs). Capital kept pouring into the industry, hitting a new record of $2.5 trillion for private capital and $830 billion for buyouts alone. A crowded marketplace pushed asset valuation to new heights. As GPs try to broaden their hunting ground, they are increasingly looking towards public markets or co-investments. Shifting dynamics also means that PE firms have to strengthen new muscles and find other sources of value creation beyond increased multiples.

Winning in this environment is all about being better and smarter. Top funds are stepping up their game in different ways. The best tech investors are avoiding over-heated sectors and focusing on sustainable growth areas where fundamentals are strong. Others are waking up to the environmental, social and governance (ESG) movement and finding ways to 'do well while doing good.' Successful firms also make sure they can spot disruption early and embed new analytics during due diligence.

These are the some of the key findings from Bain & Company's 11^th annual Global Private Equity Report, released today at Super Return International. Bain & Company is the world's leading consulting advisor to PE investors.

"Private equity investors had another strong year but they had to work harder than ever for their deals to be successful," said Hugh MacArthur, global head of Bain & Company's Private Equity practice. "Our research highlights a notable development in the US buyout market. For the first time, the returns of public markets and private equity have converged over a 10-year period. This raises questions about how private equity can stand out and remain attractive to investors going forward."

Private equity in 2019: by the numbers
Despite a somber macroeconomic outlook, global PE activity did not slow much in 2019. PE firms continued to make deals, find exits and raise even more capital than ever, fueled by enthusiasm from limited partners (LPs). 

According to Bain & Company's analysis, deal value last year was on par with historical averages at $551 billion, despite record high valuations and intense competition that capped the number of mega deals GPs could successfully close. Deal count was flat at roughly 3,600.

Public-to-private (P2P) transactions continued to propel deal-making, hitting their highest level last year since 2007. Eight of the top ten buyouts involved public companies taken private in 2019.

Co-sponsored deals with LPs reached a record value, pushed by institutional investors' appetite for private equity, and allowing GPs to strengthen their relationships.

The same forces that made deal-making hard last year also made it a good time to be a seller. A favorable exit environment persisted in 2019, continuing a six-year stretch of very strong distributions for investors. Exit value ticked only slightly lower to $405 billion, but exit count dipped to 1,078, its lowest level since 2012. Portfolios also returned to healthier post-recession holding periods, which fell to 4.3 years in 2019, well below 6 years in 2014. Anyone who had a good asset likely sold it, partly due to premium prices and partly in anticipation of a recession, when it could be harder to sell.

While investments and exits plateaued, buyout fundraising peaked in 2019, though through fewer funds. Investors poured $894 billion into private capital, which includes private equity, real estate, infrastructure and natural resources. The buyout asset class alone raised $361 billion – the largest amount on record – and increased its share to 40 percent of total private capital, the highest level since 2006. 

"When it comes to fundraising, a 'winner take all' dynamic took hold as more of the capital raised went to fewer firms," said Mr. MacArthur. "Buyout firms with solid track records, a clear sector strategy and a distinctive value-creation story proved to be attractive options for investors."

Can private equity still find opportunity in tech? 
An increasing number of firms at this late date in the cycle are looking at the soaring technology sector – long-established companies that have a track record of high margins and steady earnings, as well as a new generation of increasingly attractive, born-on-the-cloud software and services companies – and wondering: Is a growing bubble about to burst?

As alluring as tech's growth characteristics are, the red flags are hard to ignore. But Bain & Company believes that private equity will still be able to find good opportunities in the sector.  

Private equity tends to avoid the most hyped tech segments, investing instead in enterprise software companies that are more resilient in a downturn. These companies have strong revenue growth and solid fundamentals because their customers are rapidly digitizing to stay competitive. The sector has low levels of capital impairment because enterprise software is mission critical and hard to dislodge once installed. And, importantly, the number of opportunities is growing. A wave of innovation around cloud and mobile technology has expanded the pipeline of PE-ready targets as companies mature out of the venture and growth stages of development.

Investing with impact 
As social and environmental issues increasingly affect consumer behavior and business conditions, more and more investors are committed to ESG principles – particularly amid growing evidence that they can actually improve returns and limit risk.

"GPs can no longer do without a clear ESG strategy," said Mr. MacArthur. "Impact investing has the potential to be a clear game changer. The question is whether funds can do well by doing good. It is early days, but evidence such as technology and a shift in the consumer mindset is building to support the idea that impact investing will enhance performance, not detract from it."

Disruption in due diligence 
Staying ahead of the curve has always been critical in private equity. What is different today is the sheer power of technology and innovation to disrupt entire industries with blinding speed and magnitude. But there are structured, practical ways to gain real confidence about what's ahead, enabling PE firms to model and rationally evaluate the risks and opportunities born of disruption.

For any deal, it pays to use due diligence to assess where innovation is coming from. Funds that have the greatest advantage are those that analyze potential disruption from a future-back perspective that looks 10 to 20 years out and ask, "Where is disruption most likely to come from, and how might it fundamentally alter how winning companies deliver solutions in this industry?"

For PE investors with tight three- to five-year deal cycles, determining when a trend or technology may cross the all-important tipping point is critical. Insight comes from understanding cost trends and measuring what customers really value. Will an emerging source of disruption become relevant within a deal's holding period? Will it be on the horizon at exit, raising questions about the company's staying power?

Public vs. private returns: Is PE losing its advantage?
Investors have poured more than $2 trillion into buyout funds over the past decade for a simple reason: They deliver.

However, since 2009, when the global economy limped out of the worst recession in generations, US public equity returns have essentially matched returns from US buyouts at around 15 percent – not the picture most PE investors are expecting.

Working with Professor Josh Lerner of Harvard Business School, as well as State Street Global Markets and State Street Private Equity Index, Bain & Company analyzed what has been driving returns in both markets. The study found little evidence to suggest that competition from the public markets is likely to persist. But that doesn't mean that private equity should relax.

Bain & Company outlined some of the lessons drawn from the best performers. While there is no silver bullet, one common denominator emerged: Focus. The most successful firms tend to fall into four broad categories:

1. Sector specialists: These firms make it their business to know more about a given sector than anyone else. They have become so smart in that area that they can assess risk and opportunities in ways the competition can't.
2. Firms with a focused hunting ground: Like sector specialists, these firms target a sweet spot with a repeatable investment approach, but they do not limit themselves to one sector. Instead, they may have a narrower geographic focus or stick to their core buyout asset class. The key is that they know exactly what kind of risks they are underwriting in any deal and are very comfortable in managing those risks.
3. Differentiated playbook funds: These funds know from pattern recognition what kinds of companies they can improve and how. They have a well-defined playbook that works on companies with certain characteristics, and by running it with great precision, they create significant value during ownership.
4. Scale managers with broad expertise: Scale funds capitalize on their size and breadth. Their point of differentiation is that they can bring massive resources to whatever they invest in and often do the biggest, most complex deals.

Focused firms win – and win consistently – because commitment to a formula sharpens all phases of the value-creation cycle. They source deals better than others based on a keen understanding of what they are looking for and where to find it. The imperative is to develop expertise both internally and by leaning on outside partners and ecosystems if need be. LPs will continue to gravitate to the industry's top performers. The real lesson from this period of convergence is that if you are not in that group, your ability to raise funds in the future will likely be compromised.

Editor's note: To arrange an interview, contact Dan Pinkney at [email protected] or +1 646 562 8102

About Bain & Company's Private Equity Practice 
Bain & Company is the leading consulting partner to the private equity (PE) industry and its stakeholders. PE consulting at Bain has grown eightfold over the past 15 years and now represents about one quarter of the firm's global business. We maintain a global network of more than 1,000 experienced professionals serving PE clients. Our practice is more than triple the size of the next largest consulting company serving PE firms.

Bain's work with PE firms spans fund types, including buyout, infrastructure, real estate and debt. We also work with hedge funds, as well as many of the most prominent institutional investors, including sovereign wealth funds, pension funds, endowments and family investment offices. Bain & Company supports its clients across a broad range of objectives that include deal generation, due diligence, immediate post-acquisition and ongoing value addition, exit planning, firm strategy and operations, and institutional investor strategy.

About Bain & Company 
Bain & Company is a global consultancy that helps the world's most ambitious change makers define the future. Across 58 offices in 37 countries, we work alongside our clients as one team with a shared ambition to achieve extraordinary results, outperform the competition and redefine industries. We complement our tailored, integrated expertise with a vibrant ecosystem of digital innovators to deliver better, faster and more enduring outcomes. Since our founding in 1973, we have measured our success by the success of our clients. We proudly maintain the highest level of client advocacy in the industry, and our clients have outperformed the stock market 4-to-1. Learn more at www.bain.com and follow us on Twitter @BainAlerts.

Media Contact:
Dan Pinkney
Bain & Company
Tel: +1 646 562 8102
[email protected]

SOURCE Bain & Company

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