The new Private Equity Report from Bain & Co (not to be confused with Bain Capital) was released this month and we have digested it here with five takeaways about PE and dealmaking trends activity worldwide in 2013, and some of Bain’s thoughtful notes on the PE market in 2014.
Key Takeaways on Activity in 2013
· Overall deal making in 2013 was up 22% in value, driven by two mega buyouts (Dell and Heinz) but deal count dropped by 11% compared to 2012. The reason deal making was slower than usual is that valuations often exceeded what GPs were willing to pay. In addition, an open IPO window slowed public auction activities as the preferred exit route. Furthermore, the dearth of deals was driven by the ability for companies to undertake dividend recapitalizations, which enabled GPs to realize gains on an asset without selling it to other PE investors or strategic investors.
· Asia and Brazil experienced a slowdown in investment activity, particularly in volume. Investors also had difficulty exiting due to slower IPO markets in the emerging market regions. Slower economic growth contributed to the decrease in deals.
· Exit activity in other parts of the world was strong in 2013, up 9% by count. The mix of exits across channels shifted in favor of IPOs. GPs took advantage of high valuations across public and private markets to sell assets.
· Global PE fundraising climbed 21% in 2013. A flight to quality or brand names was seen as nine mega-funds were able to close. The most popular PE segment was buyout funds, which raised 89% more capital last year compared to 2012.
· Short- and long-term PE returns rebounded in 2013. They were helped by the profitable sales of many assets, including once-troubled deals from the pre-financial crisis boom years, as well as by the upward revaluation of unsold portfolio holdings.
Forecast for Dealmaking in 2014
· Increased competition and high valuations for deals will continue this year. As a result dealflow will likely come from three sources: sponsor-to-sponsor transactions as the current installed base of PE-fund portfolio companies comes up for sale, minority-stake and partnership deals as GPs look beyond buyouts, and acquisitions of small and medium-sized businesses as GPs.
· Strong exit channels will enable the liquidation of these ripe assets, assuming the equity markets stabilize, while fund-raising is poised to gather momentum in 2014.
· There is LP appetite but GPs on the fund-raising trail will confront the reality of persistent oversupply. Beyond a track record of solid performance, a stable leadership team, a compelling strategy and differentiated capabilities, GPs that hope to break through the crowd will elevate fund-raising and investor relations to a core competence.
· Alpha-generating skills are more important than ever to achieve superior PE returns, says Bain. For the foreseeable future, the key sources of market beta (GDP growth, multiple expansion and leverage) will not supply the boost they did in the past. The more complex and volatile macro environment will require a change in due diligence procedures and the “alpha skills” to read the economic signs and find less obvious opportunities. (Image source: Bain & Co)