Private Equity market poised for uptick in ‘pricey’ deals in 2014, finds fifth annual release of Bain & Company’s ‘Global Private Equity Report’



"Mountains of Dry Powder" and Robust Capital Markets Likely to Sustain High Valuations and Further Stiffen Competition for Deal-Makers This Year

New York, NY – March 3, 2014 – The private equity (PE) market is primed to expand and prosper in 2014 beyond.  New investment activity and deal volume will likely pick-up, though absent an unexpected revival in large public-to-private transactions, it's doubtful that total buyout deal value will increase; this according to the ‘Global Private Equity Report, 2014,' released today by Bain & Company, the world's leading advisor to the private equity industry.  The report further finds fund-raising success in 2013 has swelled the stock of investable PE capital, i.e. ‘dry powder,' to more than $1 trillion (about $400 billion for buyouts alone), helping to ignite intense competition and keep asset prices high.  This competition will be further stiffened and asset prices kept high as record-low interest rates, and the buoyant equities markets will likely depress deal supply, as well-performing companies go to the wide-open IPO market.

"We see an uptick in deal activity and ferocious competition on the horizon, so now more than ever, alpha-generating skills are needed to achieve superior PE returns," said Hugh MacArthur, global head of Bain's Private Equity Practice, and a co-author of the report. "While alpha comes in many shapes and sizes, we find that winners do three things better than their lower-performing peers:  they have a greater incidence of winning deals versus losing, they win bigger with deals, and they convert larger deals into winners."

Bain sees several critical dynamics shaping the 2014 deal market, including:

·         The infusion of new money into the capital coffers—fund-raising success in 2013 replaced capital from older vintages that funds had finally managed to put to work.  Nearly all capital from 2007 vintages or earlier has been invested.  And as of the start of 2014, global buyout and growth funds were sitting on $427 billion in dry powder from 2008 or later—with 80 percent in funds from vintages since 2011, and more than one-third was in a 2013 vintage fund.  The exception to the new money trend was seen in emerging markets, where the inflow of fresh funds in 2013 piled on top of the dry powder that accumulated for more than a decade. 

·         More money in the shadows—fanning the competitive flames even higher in 2014 could be the amount of ‘shadow capital' controlled by institutional investors, who are putting capital to work beyond the traditional limited partner (LP)-general partner (GP) relationship through a wide variety of relationships, including co-investments, separate managed accounts, co-sponsorships and some direct investments without the involvement of a GP.  An analysis by Bain that looked at 228 US-based buyouts valued more than $1 billion and closed between 2009 and 2013 found that LPs participated in about 20 percent of the total, typically as a co-sponsor.  "Only the biggest and most adept institutional investors have the capabilities needed to compete directly with PE funds for buyouts on a stand-alone basis," added MacArthur.  "But given the outlook for heightened competition and the search for returns, the role of shadow capital is a trend that bears watching."

·         Widen the PE pipeline—"go broader, go deeper" Bain advises GPs in its report.  A possible uptick in deal count in 2014 will largely come from three sources: 1) sponsor-to-sponsor, i.e. ‘secondary' transactions, 2) minority-stakes and partnerships, an emerging and creative source of unconventional deals that can be more lucrative than buyouts because they are custom-tailored and don't involve auctions, and 3) proactive deal-sourcing.  Even after decades of deal-making, Bain estimates that GPs have "barely scratched the surface" in terms of their penetration of the huge number of companies that could benefit from PE ownership.  Bain estimates that in the US, a mature market where PE has made some its deepest inroads, PE firms own 7,500 firms, or approximately five percent of all US businesses with revenues exceeding $10 million.  The most fertile deal hunting ground, according to Bain, will be in small companies with enterprise value less than $100 million, of which PE firms own three percent today, versus about 15 percent of companies with an enterprise value of more than $500 million—although this will likely be a less traveled path for GPs with large funds, which will be challenged to put money to work by targeting companies with less $100 million in revenues.

The report further finds that buyout exit activity started 2013 strong, ended strong and will likely carry, even accelerate that strength throughout 2014—notwithstanding volatility in the equity markets that could cause corporate buyers to become skittish and take the IPO option off of the table.

"The bright outlook on the exit front is a welcomed sign for PE funds," said Graham Elton, head of Bain's Private Equity Practice in EMEA and a co-author of the report. "But the snake swallowed an elephant—and it takes a long time for the elephant to be cleared through the system."

The good news for the industry, according to the report, is that the exit overhang is not as daunting as it first may seem.  Evaluating the overhang by the year when investments were actually made rather than by the fund vintage year reveals that much of the unrealized value is actually in newer deals and the older deals have already started liquidating.  Bain, in collaboration with CEPRES finds that 60 percent of the $908 billion in unrealized value is bound up in immature investments that are less than five years old, while only 40 percent is in ‘old' deals done in 2008 or earlier that are past the typical holding period for buyouts—and as many as three-quarters of these old deals might already have a foot out the door, having been partially realized through an IPO, a partial sale of the asset, or a dividend recapitalization.  And even with ‘old' assets that may not necessarily be ripe for exit, GPs seem to have been busy preparing their portfolio companies for eventual sale.  By mid-2013, the majority of these unrealized assets were held at par or better, with just 35 percent of deals remaining underwater.

"By mixing deft portfolio management, improving economic conditions and accommodating capital markets, GPs have come up with a potent elixir that rescued older investments, while setting themselves  up to realize strong liquidations in 2014," concluded Elton.  "As we show in our report, strategic sales and IPO exit channels seem primed to cooperate."

For a copy of Bain's ‘Global Private Equity Report, 2014' or to schedule an interview with one of the report co-authors, please contact Dan Pinkney at or +1 646 562 8102.


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