Superabundant capital, record low interest rates cut two ways for the

Media Contact:
Callie Christian
Bain & Company
Tel: +61 2-9024-8466
[email protected]
Last year marks the fourth consecutive year private equity limited partners have been cash
flow positive, with payouts from a wide open exit channel exceeding new investments in a
challenging deal environment
Sydney – March 5, 2015 – Private equity (PE) exits surged in 2014 with buyout-backed exits
hitting record highs worldwide for both count – up 15 percent – and value – up a staggering 67
percent – from 2013 levels. According to the sixth annual bellwether Global Private Equity
Report released by Bain & Company, the world’s leading advisor to PE investors, exit value was
amplified by sales of a handful of very large assets to strategic acquirers, as well as an IPO
market firing on all cylinders in the first half of the year. The IPO exit channel was particularly
strong in Europe, which experienced a doubling of buyout-backed IPOs by count and value,
turning in the best year on record. In Asia Pacific, PE-backed IPO value almost quintupled to
$63 billion.
According to Bain, superabundant capital in the hands of PE funds and investors of all types
globally, combined with plentiful, cheap debt, made 2014 a great time for PE funds to sell.
However, buyers did not fare as well, facing strong public market valuations that stirred intense
competition and inflated asset prices. Global buyout investment activity barely budged last year
– up just 2 percent by count and down the same percentage in value versus 2013 activity levels.
“Last year was undoubtedly the year of the exit, which raised the caution flag for many buyers,”
said Simon Henderson, head of Bain & Company’s Australian Private Equity Practice. “The
surge in global liquidity and near zero-interest rates has inflated asset valuations and boosted
acquisition multiples on private PE targets, which will make it more challenging to earn the same
high levels of return going forward.”
The net result of wide-open exit channels, combined with a challenging deal environment, is that
limited partners (LPs) have been cash flow positive for four consecutive years, marking the first
time in the history of the PE industry that a cash flow imbalance has been in place for such an
extended period of time and at such an extreme degree. Institutional investors continued to
recycle capital back into their best performing asset class. With so much money in the hands of
LPs looking to reinvest in PE, the improved fund-raising results that top-performing firms enjoy
is spilling over to other general partners (GPs) more broadly.
The past 25 years have seen a vast global expansion of financial assets on investors’ balance
sheets, totaling some $600 trillion in 2010. Financial assets will increase by another 50 percent
to $900 trillion by the end of the decade, according to Bain’s Macro Trends Group. With
undeployed capital – or dry powder – at a record high and a limited supply of attractive
investment opportunities, fierce competition for assets and very high prices show no signs of
letting up anytime soon.
Other key findings from the Bain PE report:
PE limited partners are increasingly experimenting with shadow capital, the vast
sums of money that institutional investors are putting to work through co-investments,
separately managed accounts and direct investments. The biggest risk of shadow capital
is not the threat of LPs competing directly with GPs, which remains small; it is whether it
will change the economics of the industry as GPs trade increases in assets under
management for a discount in their services.
Investors are renewing their focus on the U.S. Bain’s Macro Trends Group sees
several secular trends that could power the U.S. economic expansion through the rest of
this decade and potentially beyond. While the U.S. market has a deep pool of companies
to buy, it is also PE’s most mature and intensely competitive market. Among middlemarket businesses with an enterprise value of between $100 million and $500 million, for
example, Bain found that PE ownership increased from 8 percent of companies in 2000
to 23 percent in 2013—nearly one company out of four.
Returns for the PE industry are compressing, as the spread between the top- and
bottom-performing funds has narrowed for recent fund vintages. Swings in just one or
two deals can push a fund out of one quartile and into another. Bain analysis found that it
is only after around the seventh year in a fund’s life that investors can have confidence in
knowing where a fund will ultimately end up
Looking ahead to the rest of 2015 and beyond, Bain predicts that superabundant capital is here to
stay – and could continue to challenge PE investors going forward. Plentiful, low-cost debt in
the hands of yield-hungry creditors adds upward pressure on prices and ensures they will stay
high. At the same time, longer holding periods will be more the norm to prepare fully priced
assets for exits that deliver attractive returns.
“We’ve entered a different world where plenty of money in the hands of many has had a
democratizing effect on PE returns, making it harder to spot the winners,” said Henderson. “Past
performance is not always a reliable indicator of future returns and, as a result, PE firms are
going back to basics to generate market-beating returns.”
In response, Bain anticipates an uptick in the number of leading PE firms seeking creative ways
to identify new investment themes before the market fully prices them. Specifically, GPs are
developing repeatable sourcing models to separate themselves from the pack of rivals showing
up at auctions ready to pay full price.
Bain also cautions that in the age of consistently high asset values, GPs can no longer count on
market beta to help boost their returns. GPs that aspire to consistent top-quartile performance
will need to be thoughtful about which investment thesis to pursue, follow up with great due
diligence on the assets they pursue, and apply a disciplined, repeatable value-creation process to
every company in their portfolio.
To arrange an interview with Mr. Henderson, please contact Callie Christian at
[email protected] or +61 2-9024-8466
To download a copy of the report, click here
About Bain’s Private Equity Business
Bain & Company is the leading consulting partner to the private equity (PE) industry and its
stakeholders. PE consulting at Bain has grown fivefold over the past 15 years and now represents
about one-quarter of the firm’s global business. Bain maintains a global network of more than
1,000 experienced professionals serving PE clients. The firm’s practice is more than triple the
size of the next-largest consulting firm serving PE firms.
Bain’s work with PE firms spans fund types, including buyout, infrastructure, real estate and
debt, as well as hedge funds and many of the most prominent institutional investors, such as
sovereign wealth funds, pension funds, endowments and family investment offices. Bain
supports its clients across a broad range of objectives that include deal generation, due diligence,
immediate post-acquisition, ongoing value addition, exit, firm strategy and operations, and
institutional investor strategy.
About Bain & Company
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