Bain report highlights how the industry is set for growth after the derailment it saw in 2022
Last year could have been a record-breaker for the global private equity (PE) industry, but then came sharp-rising interest rates.
Mid-2022, IPOs were halted, deal volume dropped 10% to 2,318 and global buyout value slumped by 35% to US$654 billion, derailing the potential for the year to smash 2021’s $1 trillion record high for completed deals.
But 2023 has an optimistic tone and individual investors are set to become a big part of the rebound, according to a new report from Bain & Company.
Its Global Private Equity Report calls for strong long-term growth, thanks to the sector’s strong and resilient underlying fundamentals, and shows the potential for the PE sector to become even more appealing to investors chafing at the limitations of public markets, despite the shifting economic tides.
The industry ended last year with a record $3.7 trillion in dry powder and Rebecca Burack, head of the global Private Equity practice at Bain & Company, says that the best firms will adjust to do deals that work even with lower levels of activity.
“Winners will stay close to their proven sweet spots. Critical to their success will be underwriting dealmaking where their expertise and confidence are highest,” she said. “We’ve seen from past periods of dislocation that investors who follow this strategy have generated very strong returns – so staying in the game is important for all of the industry’s stakeholders.”
The report shows that individual retail investors hold around half of all global assets under management, which is estimated to total $275 trillion to $295 trillion.
But with only 16% of the capital held by alternative investment funds, this segment represents a vast, untapped market for PE managers seeking to sustain double-digit growth as the industry matures, the report notes.
Those funds that are exploring the retail investment market are moving quickly and forcing the rest of the industry to follow.
High-net-worth individuals (HNWIs) and their advisors are becoming more interested in alternative investments for diversification and the industry is pushing ahead with new ways to satisfy increasing demand.
But Bain says there is a learning curve for asset managers and banks around how to make channels work at scale.
The report highlights that investors should assume higher interest rate risk due to factors such as ageing populations, government budget strains, and rising material costs due to the global supply chain crunch and trends to onshoring.
That, it says, creates a new imperative for private equity to create value through margin improvement and organic growth.
While PE firms are under pressure to decarbonize their portfolios, the sector has an opportunity to help drive the energy transition, while the growth of so-called Web 3 technologies present a burgeoning opportunity for growth.