BOSTON & LONDON—March 11, 2024—Global private equity is now seeing the beginnings of a pick-up in activity, with ‘green shoots’ emerging for prospects this year and beyond, despite 2023 having seen PE’s sharpest drop-off since the global financial crisis of 2008-09, Bain & Company’s 15^th annual Global Private Equity Report, released today, concludes.

Private equity dealmaking as well as exits succumbed to steep declines last year in the face of rapid increases in interest rates, the sharpest since the 1980s, which sapped investor confidence in a malaise spreading to every region and aggravating 2022 setbacks. Buyout investment value dropped by 37% year-on-year last year alone to $438 billion, the worst total since 2016, and was left 60% down compared with 2021’s peak. Against 2021 highs, deal count was down 35% and exits value were down by two-thirds (66%).

But today’s Bain analysis finds that, while major challenges to a full-blown revival persist, the PE industry is witnessing a steady ticking upwards in activity which – while still tentative – sets the stage for improved fortunes barring new macro shocks, with even limited rate cuts hinted at by the US Federal Reserve likely to spur increased dealmaking. With buyout funds alone sitting on record uncommitted funds of $1.2 trillion in dry powder, 26% of which is four or more years old, the anticipated revival will likely be stoked by the heavier than normal incentives for general partners (GPs) to resume dealmaking, Bain finds.

“The deal market is getting off to a somewhat better start this year and we’re cautiously optimistic over prospects. The sheer scale and speed of rate rises last year, and the uncertainty around that, was a shock for the industry in 2023. But the outlook remains sound. With rates set to moderate in coming months there’s a greater sense of stability. Coupled with the incentives to put the record mountain of dry powder to work, we expect GPs to come off the sidelines. But passively waiting for conditions to recover is not a viable strategy,” said Hugh MacArthur, chairman of the global Private Equity practice at Bain & Company.

Yet while PE conditions are starting to brighten again, Bain also warns in today’s report that the industry continues to confronts key and unprecedented challenges, magnified by the vast increase in its size and complexity since the global financial crisis, as well as persistent macro uncertainties as anxieties over recession risks continue to nag even given robust US growth, with record-low unemployment and strong equity markets.

Exit deep freeze presents private equity’s critical challenge

Exits are singled out by today’s Bain report as the industry’s most pressing issue, with exit markets having seized up, stanching return flows of capital to limited partners (LPs) while leaving GPs sitting on an aging $3.2 trillion of unsold assets, accounted for by some 28,000 companies. Businesses held for a lengthy four years or longer comprised 46% of the total, the highest since 2012. The plunge in exit activity saw buyout-based exits drop by 44% in the last year alone, to $345 billion by value, while the number of exit transactions fell by 24% to 1,067, with exits slack across all geographies.

“The exit conundrum is now really critical to fix as the market improves – the current threat to investor cash flows and the sector’s liquidity is very real,” Rebecca Burack, head of the global Private Equity practice at Bain & Company. “Breaking the logjam will need GPs to take charge of their destiny in terms of how they can manage portfolios in order to generate increased distributions for LPs.”

The deep freeze trend for exits detailed by Bain came as corporate M&A activity dried up, with harried corporate executives struggling to plan acquisitions amid macro uncertainty and rising rates driving up financing costs. Still, corporate buyers accounted for nearly 80% of total exit value in 2023, some $271 billion, down 45% from the previous year.

Sponsor-to-sponsor exits – deals between PE firms – were also hard hit, with these transactions dropping 47% from 2022 to $62 billion, with PE buyers deterred by higher rates leading to a need to spend more to borrow less as a multiple of a portfolio company’s earnings (EBITDA). The IPO exit channel showed some signs of life, meanwhile, rising to $11.8 billion last year from $6.9 billion in 2022, but IPOs still made up just 3% of total exits volume.

Breaking the exits logjam now crucial as cash becomes king

None of these three main exit channels are likely to rebound vigorously in the short term, Bain warns, leaving buyout funds struggling to make any meaningful dent in their $3.2 trillion pile of unexited assets while higher rates trigger rising financing costs for portfolio businesses. Last year, $95 billion in leveraged loans requiring refinancing at higher rate and by year-end 2025, loans worth more than three times that amount, some $300 billion, will mature, making life tough for GPs yet to exit those.

In the face of these challenges, Bain says PE funds need to take urgent action on multiple fronts to break the exit logjam. GPs should double down on value creation, using every possible means to boost growth and earnings in portfolio companies as higher rates weigh on valuation multiples, today’s report counsels. It advises this should sit alongside more aggressive portfolio management to dispose of assets sellable for an attractive return, with restructured balance sheets where necessary, in order to boost distributions of capital to LPs. At the same time Bain says GPs need to professionalize fund-raising amid intensified competition for limited capital pools.

“Getting unstuck demands action in several directions. What’s critical is demonstrating to LP investors that your firm is a responsible steward of capital with a disciplined, unemotional plan to break the gridlock. Cash is clearly king now in private capital – and it needs to be a top priority,” Rebecca Burack added.

Rate hikes take a heavy toll on confidence and activity as competition for capital intensifies

Bain’s analysis charts the setbacks suffered by the PE sector last year as the Federal Reserve’s successive interest rate increases – totaling 525 basis points (5.25 percentage points) from March 2022 to July last year – exacted a heavy toll on the industry’s confidence and extended the setbacks in performance suffered since mid-2022.

Within the plunge of more than a third (37%) in buyout values, deals of all kinds were impacted but those dependent on bank financing suffered most as yields on large, syndicated loans approach 11% in the US and 9% in Europe, marking 10-year highs.

With leveraged loan costs soaring, loan issuance for leveraged buyouts. In turn, the scarcity of affordable leverage cut the number of PE “megadeals” over $5 billion dropped by almost half while the average deal size fell to $788 million compared with a peak of $1 billion in 2021.

Growth equity and venture capital segments meanwhile drifted sideways last year, after the rapid reversals of 2022 from their earlier boom during the pandemic, with growth-based valuations especially exposed to the impact of higher rates. These segments were also buffeted by the lingering effects of the 2022 crypto collapse as well as 2023’s implosion of Silicon Valley Bank.

Elevated interest rates also saw private credit continuing to aggressively fill gaps left by big banks’ retreat from deal finance, capturing 84% of the middle market – deals with total lending of under $500 million. Meanwhile, dearer finance saw investors use less debt and more equity so that debt multiples last year dropped 17% from the prior year to 5.9x EBITDA, their lowest since 2012.

In the face of the past year’s upsets, PE fund-raising still contributed an impressive $1.2 trillion to the industry’s stunning total of $7.1 trillion in accumulated capital raised since 2019. Still, the amount raised was still the lowest annual amount since 2018 – down 20% from 2022 and 30% from 2021’s all-time high. Buyout funds were the only segment to post fund-raising gains, with a rise of 18%, but LPs notably gravitating to large funds offering reliable performance – the top 20 fund managers raised a disproportionate 51% of capital for buyouts. The preference for large funds, with the average fund size of a record $1.2 billion and up 83% from 2022, masked a sharp decline in overall fund-raising success, with the number of funds closed (449) down 38% year-on-year.

Competition for capital also reached new levels of intensity. As of January 2024, 14,500 PE funds were seeking $3.2 trillion in capital, yet a supply/demand imbalance saw only $1 closing for every $2.40 targeted.

Secondaries at a tipping point as PE seeks innovative liquidity solutions

Secondary funds – a catch-all term for funds which help GPs and LPs to sell or restructure private capital holdings to generate liquidity – raised almost double (+93%) the amount of capital in 2023 than in the previous year, although from a small base. Secondaries grew faster than any other asset class over the year in an expansion driven by the current PE liquidity crunch flowing from the sector’s $3.2 trillion pile of unsold businesses.

The secondaries market may provide an important solution to PE’s need to free-up liquidity and thaw the frozen exits marketplace, with exponential scope for secondaries to continue to grow, Bain finds.

Although the asset class is presently small, with secondaries providing only about $120 billion in liquidity annual to an industry with over $20 trillion in assets under management globally, the report concludes there is every reason to believe that the secondaries market can find a way to scale up. To do so, Bain suggests a need to devise innovative structures to capture the opportunity, with a critical factor being the presence of an “honest broker” so that all sides of a transaction know deal value and structure is determined fairly.

Gen AI’s set to be a private equity gamechanger across the value chain

The scope for private equity from generative AI is also analyzed by Bain, which concludes the technology has potential to be a “gamechanger” for the industry in several ways. A key area of potential is in deal sourcing, it finds. With fund professionals screening multiple possible deals to find one worth pursuing, generative AI’s capability to scan massive pools of data for insights can be a major productivity enhancer to make dealmakers smarter and faster, boosting returns, today’s report says.

Bain suggests AI can also have a transformative impact of multiple areas of PE funds’ operations across the value-creation cycle. Firms can deploy AI for tasks from automated data room scraping to making due diligence more routine and efficient while also securing a more complete picture of a target company’s prospects, to streamlining back-office functions.

But Bain also cautions that PE firms will also need to assess another game-changing dimension of AI by looking at how portfolio companies’ may be affected by the technology and gauging whether these businesses can lead innovation in use of AI or will see their activities disrupted by it.

Buy-and-build needs a new winning formula of organic value creation in face of higher rates

Buy-and-build remains one of PE’s most popular strategies but is now in need of new approaches as persistently higher rates make it harder to secure returns in this part of the market, Bain concludes.  It notes that buy-and-build has been fuelled by the practice of building a company with high-valuation multiple by using a well-positioned platform business to which smaller businesses bought at lower valuation multiples can be bolted on.

This “multiple arbitrage” capitalized on the market assigning higher valuation multiples to larger companies than smaller ones. But Bain finds that in an era of high rates, with financing costs approximately doubled since 2020, generating acceptable returns is now much harder. Consequently, the report argues that taking buy-and-build to the next level requires PE firms to double down on securing growth and stronger margins for organic value creation.

Media contacts

To arrange an interview or for any questions, please contact:

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Ann Lee (Singapore) — Email: ann.lee@bain.com

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