Private equity funds mark best 5-year stretch ever

2018 was another stellar year with a surge in investment value

Private equity funds mark best 5-year stretch ever
Steve Randall

The global private equity funds sector is buoyant right now and last year capped funds’ best 5-year run in history.

Investors are interested in the sector as they see values rising against other asset classes such as hedge funds.

PE funds saw a surge in investment value in 2018 to U$2.5 trillion in disclosed buyout deal value according to the tenth annual Global Private Equity Report from industry advisors Bain & Company.

"The last five years, from 2014-2018, have been some of the best in the private equity industry. We've seen some of the highest levels of capital raised and put to work, the most exits and decent returns," said Hugh MacArthur, global head of Bain & Company's Private Equity practice.

However, he said that the sector is working hard to keep up the momentum with high levels of competition driving deal multiples to historic high, while concern about the next recession is impacting investment decisions.

"These risks are raising the bar for the buyer to do great due diligence, which involves integrating both the commercial and operational sides of diligence, and to structure deals thoughtfully," MacArthur said.

How 2018 performed
Individual buyout transactions were down 13% due to competition and rising asset prices with a total 2,936 worldwide; however, total buyout value jumped 10% to $582 billion (including add-on deals), capping the strongest five-year run in the industry's history.

The performance owed much to an upswing in public-to-private transactions, which globally reached their highest value since the previous take-private boom in 2006–07.

With 1,146 transactions valued at $378 billion, exit activity came in on par with 2017 – still a strong contributor to a historic five-year stretch that has produced unprecedented distributions for investors.  The robust performance brought total disclosed exit value since 2014 to $2 trillion, by far the largest five-year total on record. 

PE dry powder has been on the rise since 2012 and hit a record high of $2 trillion at year-end 2018 across all PE fund types ($695 billion for buyouts alone).

PE funds attracted an impressive amount of capital in 2018, although the pace slackened from 2017's record-breaking performance. GPs raised $714 billion from investors during the year—the third-largest amount on record—bringing the total since 2014 to $3.7 trillion.

Outlook for 2019

Fund managers are challenged by how they should put their record levels of dry powder to work, amid strong competition and rising asset prices.

Among the trends that Bain & Company sees are more firms focusing on public-to-private deals as private multiples have surged and public multiples begin to price in the threat of a recession.

This focus is on companies with an enterprise value between $2 billion and $10 billion that could be purchased for a multiple plus take-private premium that is still below the average private-market multiple.

For PE firms and their investors if private multiples remain elevated over the long term, Bain & Company sees several implications:

  • Goodbye, IPO exits. If private multiples remain high relative to public valuations, it becomes less attractive to exit via an IPO.
  • Public company targets. One obvious place to look for big companies is the public markets. For many large firms, this will likely become an increasingly important target environment, requiring a shift in their approach to deal sourcing, screening and due diligence.
  • Even bigger megafunds. Funds are growing in size, and the take-private opportunity in the public markets makes a case for even bigger funds capable of transacting ever-larger P2P deals.
  • Democratization of private equity. Given the growth of the private markets and their higher return potential vs. public markets, making private equity more accessible to retail investors is gaining importance. Already, retail investors are struggling to gain exposure to the small and middle-market companies that have been the bread and butter of private equity. These companies are increasingly turning to private financing to avoid the cost and hassle of being publicly traded.

“The trend toward bigger and bigger deals, including large take-private transactions, will require significant changes in how most PE firms operate," said MacArthur. "A playbook for a $20 billion acquisition is not a simple 'scale up' of the playbook firms use to unlock value at a $2 billion company. The bottom line is that firms need to adjust their investment and capabilities to the task at hand. Tackling larger deals successfully means matching due diligence and resources post-close to the increased scale of the investment."