Private Equity Emerges Wiser as Exit Boom Winds Down

Private Equity Emerges Wiser as Exit Boom Winds Down

The recent slower pace of private equity fund investments portends a falloff in exits over the coming five years.

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Private Equity Emerges Wiser as Exit Boom Winds Down

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The stars aligned in 2015, making it another strong year on the private equity exit front. Asset valuations were near all-time highs, and PE funds wanting to liquidate portfolio holdings found buyers eager to oblige. With $422 billion in realizations and 1,166 deals reported at year-end, asset sales were just shy of their all-time peak. But as we explain in Bain & Company’s newly released Global Private Equity Report 2016, the recent slower pace of PE fund investments portends a falloff in exits over the coming five years (see figure).


As the slower pace of investments feeds through to fewer exits and smaller cash distributions flowing back to LPs in the period ahead, the PE industry should settle into a more sedate new normal next year and beyond. Let’s review what made the period since the global financial crisis such a uniquely vibrant period for exit activity and the lessons learned that will serve PE firms well in any exit environment.

Many GPs took advantage of favorable exit conditions to complete the years-long process of selling off their large inventories of unrealized assets acquired before the global financial crisis. Purchased at peak prices before 2008 and sharply devalued following the market meltdown, these holdings sat in their fund portfolios as GPs patiently rehabilitated them and waited out the recovery.

Robust exit channels over the past three years provided the opening GPs were looking for to sell. Of the exits completed in 2013, 87% were assets purchased in 2010 or earlier. In 2014, 76% of exits were assets belonging to those older vintages. Last year, the backlog of older holdings made up just 57% of exits. In fact, sales of holdings acquired since 2011 nearly equaled those purchased during the peak years of the previous PE cycle for the first time.

These gains were not simply the passive result of PE funds aging out of the problem of long-held unrealized assets by waiting for exit channels to open up. GPs actively cultivated this success by taking steps that maximized both their exit options and realized returns. They tested several exit strategies in search of the one that would yield a timely sale at the best price. Many conducted quarterly or even monthly reviews of exit scenarios for portfolio companies primed for sale. In some cases, GPs hired experts to conduct due diligence on portfolio companies slated for sale to uncover and resolve any issues that could complicate a planned exit. And some GPs even went an extra step to identify and pursue initiatives that have the potential to burnish a portfolio company’s performance and further set the stage for a successful exit.

The hard lessons learned since the recent downturn and the increasing sophistication of exit management skills that PE funds are applying to their soon-to-be-sold portfolio companies have changed how GPs think about exit channels. They are approaching exit channels with an open mind to weigh all of the factors influencing their channel choice and with nimble reflexes to adapt to quickly shifting constraints and opportunities. Often they will pursue several channels in parallel, continuing to ready IPOs even as they negotiate terms for a direct sale to a corporate buyer or for a secondary sale to another PE fund. Over the past two decades, across channels, average internal rates of return have begun to converge as GPs have learned to bob and weave across exit channels in order to optimize asset sales. The reflexes PE firms sharpened in recent years will get a workout as the pace of exits slows in the period ahead.

Hugh MacArthur, Graham Elton, Dan Haas and Suvir Varma are leaders of Bain & Company’s Private Equity Group.

Carl Evander is a principal in Bain’s Private Equity Group.


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