Graham Rose: How PE Funds Need to Start Acting More Like Corporate Buyers

PE firms need to consider new capabilities in order to succeed against corporations in the mergers-and-acquisitions market. Graham Rose, a partner in Bain's Private Equity practice, outlines how PE firms can close the gap with corporate buyers, win their share of the market, and eliminate stress from capital overhang.

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Read the transcript below.

GRAHAM ROSE: This has been a pretty astonishing five year period for the industry. Since 2012, buyout funds alone have raised $1.1 trillion of capital including just over $300 billion last year, a record amount. The issue for the industry is that they're not nearly deploying that capital as fast as they're raising it.

So just to put some context around that, in 2014 to 2017, the number of deals done actually declined by 19%. At the same time, the amount of capital committed to funds was up 12% per annum. There's clearly a mismatch between these two.

So as we look forward and think about the levers that are at the disposal of private equity to actually close that gap, one of them is just winning more share of overall M&A. Today, private equity accounts for only 8% of the total deal count done globally and 12% of the value. It's a very small amount. There's a lot of white space to be had.

It's not going to be that easy though. Corporate acquirers do have some advantages that private equity don't. There's the value strategically. There are the synergies. And therefore at the end of the day, they can pay a fuller price.

There's also the mismatch between time expectations. Private equity funds typically deal in three to five year periods. That's not enough time to actually get some of these long-term M&A deals done. Furthermore, there's actually a potential issue as you think about the size of positions in portfolios. Doing large deals means a lot of portfolio concentration. That can involve a fair amount of risk for the private equity buyers.

And finally, there's a whole new set of capabilities that may be required to be successful. However, thinking about the last couple of years, we've seen some signs this is beginning to change. JB Holding's merger of Dr Pepper and Snapple and Keurig ended up being one of those deals.

And so we're starting to see some movement in the marketplace. As we think about private equity going forward, there are a number of capabilities that they can build to help close the gap. There are the ability to work with complex and large balance sheets, a talent management program, operational levers and improvement opportunities.

And finally, it's actually the ability to undertake transformative ideas. Digital is one, real practical digital implementation that drive outcomes and results. If private equity can start to build these capabilities, there's the opportunity to close the gap with corporates, begin to win the share of the overall marketplace and relieve the stress in the industry that results from this overhang of capital.