LONDON—July 18, 2021—We appear to be nearing the end of the business cycle. While a range of factors could yet still shift the outlook, the global private equity industry is already slowing in the face of inflation and rising recession risks. But the sector is well positioned to weather the storm and emerge even stronger, Bain & Company’s latest midyear analysis of the PE market concludes.

“The takeaway here is that PE funds will need to manage proactively to anticipate change and get ahead of it. That will be critical in weathering this period of turbulence and taking full advantage of the recovery to come,” said Hugh MacArthur, global Private Equity practice leader at Bain & Company.

He added: “Data shows the industry has relied disproportionately on expanding valuation multiples to support returns over the past two decades, but that won’t work in a period of inflation. Top-tier performance moving forward will depend on nuts-and-bolts value creation and a clear understanding of how to manage effectively during a period of rising prices.”

Immediate repercussions of economic downturn, higher inflation and rates emerging in PE

The cyclical nature of the private equity sector means that weakening economic conditions across major economies will challenge dealmakers, despite the first half of 2022 being on pace to produce the second highest annual buy-out deal value after a record 2021, Bain’s Midyear Global PE Market Update warns. The first half of 2022 alone registered $512 billion in buyout deal value, and an average deal size close to $1 billion in that period.

The slowdown that Bain anticipates in deal flow and values is already emerging, it finds, with deal pipelines softening, especially in the high-valuation technology sector. Debt is becoming more expensive and Bain notes that banks are also increasingly pressing questions regarding companies’ exposure to inflation and rising rates, making it more difficult to close transactions.

Public market woes have already seen an impact on deal exits as the market for IPOs has largely dried up, Bain’s analysis notes. Global buyout backed exit value hit $338 billion in the first half of 2022, down some 37% on the same period a year earlier.

Meanwhile, global IPO value, including both buyout-backed and others, at $91 billion was 73% down versus the first half of 2021. Bain & Company expects that as the present economic turbulence grinds on, these slowdown trends will likely extend to deal exits across the board.

Knock-on impact on lengthening hold periods, stronger secondaries market growth and weakening fund-raising

Bain’s report identifies a series of knock-on consequences with PE hold periods set to extend, while at the same time the secondaries market is poised for more growth as investors look for alternate ways to generate liquidity, and fund-raising, already sharply lower, is set to decline further in the short-term. Buy-out fund-raising dropped from $284 billion to $138 billion, comparing the first half of 2021 to the same period in 2022.

Record $3.6 trillion in dry powder leaves PE sector in good stead to emerge stronger

Despite these short-term challenges, Bain’s report concludes that ample “dry powder” puts the PE sector in good stead to weather the present downturn. Many GPs have recently raised funds, it notes, and global dry powder continued to rise in the first half of 2022, now standing at a record high of $3.6 trillion. PE funds are positioned for a strong rebound. Looking back at a 25-year history of the industry, post-downturn market conditions have generated superior returns for investors.

Hugh MacArthur added: “Looking over the long history, Private equity has proven to be resilient to economic downturns. It is a cyclical business and we expect to see some short-term challenges. However, over the long-term, we still believe that PE will continue to grow— and that it will remain the best performing asset class across market conditions.”

Notes to editors: To arange an interview, please contact Dan Pinkney at dan.pinkney@bain.com or tel: +1 646-562-8102 or Gary Duncan at gary.duncan@bain.com or tel: +44 (0) 7788 163 791.