Private Equity: Still Booming, but Is the Cycle Near Its End? By Bain & Company

Hugh MacArthur – Partner/Bain & Company

This section of Bain’s 2019 Global Private Equity Report examines how the industry performed last year, from investments and exits to fundraising and returns. Explore the contents of the report here ordownload the PDF to read the full report.

The beginning of the rest of the story?

The past five years have been ones of unprecedented success for the private equity industry. During that span, more money has been raised, invested and distributed back to investors than in any other period in the industry’s history. Private investment in general, and private equity in particular, seems to be on a secular penetration curve that has no end in sight. Yet, there are also some cautionary notes to sound.

Returns, while still strong relative to other asset classes, have slowly declined toward public market averages during the period. Persistent high prices, volatile capital markets, US–China trade arguments, Brexit worries and, of course, the ever-present threat of recession have injected a sense of uncertainty that dealmakers dislike. The pace of technological change is also increasing in almost every industry, making it harder to forecast winners and losers. So, while the good times are rolling, some bells of worry are tolling.

In this, Bain’s 10th-anniversary Global Private Equity Report, we look fearlessly at the industry’s strengths, its challenges and the evolutionary path that lies ahead.

The private equity market in 2018: What happened?

As the current economic expansion chugged into its ninth full year in 2018, the global private equity (PE) industry continued to make deals, find exits and raise capital at a historic five-year pace. Limited partners (LPs) remain highly enthusiastic and have continued to flood the market with fresh capital. Keeping the momentum going, however, has hardly been easy.

Chronically heavy competition has driven deal multiples to historic highs, and growing jitters about an eventual economic downturn are affecting decision making, from diligence to exit planning. For general partners (GPs), putting record amounts of capital to work means getting comfortable with a certain level of discomfort when investing. They are paying prices they swore they would never pay and looking to capture value that may prove elusive post-close. The most effective GPs are stepping up their game to identify targets and sharpen diligence, while simultaneously planning for the worst. In Sections 2 and 3, we’ll explore several strategies firms are using to make the most of an increasingly difficult market. In the meantime, here’s what happened in 2018.

• • •

Investments: More strength, same challenges

Amid heavy pressure to do deals, the PE industry saw another impressive surge in investment value in 2018. Fierce competition and rising asset prices continued to constrain deal count—pushing down the number of individual transactions by 13%, to 2,936 worldwide—but total buyout value jumped 10% to $582 billion (including add-on deals), capping the strongest five-year run in the industry’s history (see Figure 1.1).

Figure 1.1

While the current investment cycle hasn’t been a steady upward march, especially in terms of deal count, it has shown great resilience and overall strength. Every year since 2014 has produced higher deal value than any year in the previous cycle, with the exception of the peak in 2006 and 2007. Over this period, the industry has benefited from an unprecedented wave of investor interest, buttressed by ebullient equity markets, low interest rates and steady GDP growth in the US and Europe. For GPs, it has been a remarkable run.

Predictably, experts are debating how long the good times can last. Only one other US recovery on record (from 1991 to 2001) has extended as long as this one. While GDP growth in the West remains strong, US interest rates are rising as inflation picks up in the US and Europe. Slowing growth in China, global trade tensions, ongoing uncertainty about Brexit and year-end market volatility are all fueling concern that this cycle may be running its course.

For PE firms, however, the question isn’t so much when the next downturn will appear as how to negotiate it successfully when it does. With record amounts of capital to invest, it doesn’t pay to sit idle trying to time the downturn. Instead, GPs are finding ways to cope with a growing level of macro uncertainty and planning carefully for how they can profit from the downturn. With the global financial crisis fresh in their memories, firms are focusing their diligence much more intently on downside scenarios this time around. They learned valuable lessons during the crisis about what holds up well through the cycle—or not—and are adjusting accordingly. Even within a sector like healthcare, widely viewed as recession-resistant, there were subsector differences in performance worth noting. Healthcare support services, for instance, produced multiples of better than two times invested capital, while healthcare equipment and pharmaceuticals fared less well, according to CEPRES, a digital investment platform and transactional network for the private capital markets (see Figure 1.2).

Hugh MacArthur/Partner, Boston

Rebecca Burack/Partner, Boston

Christophe De Vusser/Partner, Brussels

Kiki Yang/Partner, Hong Kong

Brenda Rainey/Practice Director

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