The more things change, the more they stay the same. In many ways, 2016 felt similar to the past several years. The year was marked by high prices, limited partners flush with cash from a sixth straight year of distributions outstripping capital calls, and a great fund-raising environment. About the only thing different was a relative dearth of exits. Exit markets were still healthy, but it is clear that the proverbial elephant—2006 and 2007 deals—has now largely passed through the snake. We are headed for more balance in PE markets.
A big question now on most deal makers’ minds is how to grapple with a new reality that isn’t so new anymore and that looks like it will be around for quite a while. Capital superabundance and the tide of recent exits drove dry powder to yet another record high in 2016. Shadow capital in the form of coinvestment and cosponsorship could add another 15%–20% to that number. While caution about interest rates remains, there is a general expectation that debt will remain affordable. As a result, deals won’t be getting any cheaper.
High prices can put a limit on the number of deals being done. Many processes fall apart because of a chasm between seller expectations and buyer investment models. Structurally high asset prices also eliminate any margin for error in finding winners, developing differentiated investment theses and underwriting the risks that a general partner must also have the muscles to deliver against.
Please read on to understand how leading PE investors are taking on these challenges. They have been evolving their business models and tactics to deliver the returns expected of them. The future is coming into higher definition, and it will favor those investors who understand acutely what they do best and how to capitalize aggressively on their strengths amid macro uncertainty and fierce competition.
We hope you will enjoy Bain’s latest Global Private Equity Report, and we look forward to continuing our dialogue with you in the year ahead.
Hugh H. MacArthur
Head of Global Private Equity