Bain & Co: Macro uncertainty is the biggest enemy of dealmaking

Inflation and rising interest rates, as well as the uncertainty surrounding the Ukraine conflict, could cause a turn of fortunes in the industry, says Bain’s EVP of private equity.

The exuberance and supersizing of the private equity industry that we saw in 2021 may alter dramatically as global markets face adverse shocks in the year ahead.

The industry’s growth could be tipped sideways by forces such as inflation, interest rates and the Ukraine conflict, Brenda Rainey, executive vice-president of Bain & Company’s global private equity practice, told Private Equity International.

“Macro uncertainty is really the enemy of deal markets,” she added. “One thing that private markets dislike is uncertainty, especially when it comes to macro. How much uncertainty there is will be directly correlated to the impact on dealmaking in 2022.”

Front and centre right now is the conflict in Ukraine. Although the private equity industry’s direct exposure to Central and Eastern Europe is relatively small (capital raising in the region in the last decade accounted for less than 1 percent of global capital raise, according to Rainey), the effects of the crisis will ripple through markets in the years to come.

While it’s “way too early” to know what those effects are going to be on different regions and industries, there are clear implications for oil and gas supply, she noted. “It’s one of those situations where nobody can have confidence today around the likely outcome. PE firms and their portfolio companies need to be considering many different potential outcomes and watch the situation closely.”

Rainey also underscored the impact that inflation and interest rates will have on investors in 2022 and beyond. “The industry – and really the world – has not wrestled with global inflation in over 40 years, so this is new. And while PE firms have a cost-out playbook that they honed through the financial crisis, the price-up playbook is still being developed for a lot of PE firms.”

What’s more, high prices being paid for assets and high levels of leverage being put on deals could cause a turn of fortunes in the industry, she added.

Buyout deal value and exits hit new records in 2021, according to Bain’s Global Private Equity Report 2022. Buyout deals reached $1.1 trillion, roughly double 2020’s total of $577 billion and shattering the old record of $804 billion in 2006. Growth was up across all regions, with North American deals at $537 billion, accounting for nearly half of all deals transacted.

Deal size, not deal count, was behind the increase in value as bigger funds secured bigger deals, the report noted. The 10 largest deals, including the more than $30 billion investment in Medline Industries by Blackstone, Carlyle Group, Hellman & Friedman and GIC, made up 18 percent of total deal value. The average deal size saw a 57 percent increase in 2021 from the prior year, pushing past the $1 billion threshold for the first time.

Public-to-privates also drove dealmaking, with $469 billion of such deals recorded – up 57 percent from the previous year’s $298 billion. In fact, private equity investors paid rich multiples for take-privates at an average 19.3 times EV/EBITDA, or 1.6 times the average.

Exits totalled $957 billion, more than double 2020’s $460 billion and exceeding the five-year average by 131 percent. Each and every exit channel – from sales, corporates and PE firms to special purpose acquisition companies and initial public offerings – rose in 2021.

Fundraising also saw a burst of activity, with $1.2 trillion gathered in 2021 by buyout, venture, growth, secondaries, infrastructure, real estate and co-investment funds. That compares with $1.08 trillion in 2020. Buyout funds raised $387 billion in 2021, their second-best year ever. Most funds, however, took longer to hold final closes in 2021 than in previous years, Bain noted in the report. Funds that reached their target in less than a year dropped from 44 percent to 33 percent.

Growth equity’s crossover investors

As Bain’s latest report shows, growth equity is no longer a nascent strategy. Assets under management by growth equity funds have grown around twice the pace of buyout AUM over the past decade, with a compound annual growth rate of 18 percent.

Growth equity and late-stage deal value, meanwhile, shot to $685 billion in 2021, from $371 billion the year before. Technology deals are by far the main targets, but investor demand for healthcare and financial services deals have also surged.

Hedge funds have become prolific investors and have set the pace in growth equity investing in recent years, and are “most responsible for changing how the game is played”, Bain noted.

Attributes including “lightning-fast decision-making, aggressive equity funding and agnostic approach to control” are a departure from the buyout model, according to the report. Tiger Global, with $95 billion under management, has a large presence in the market and has bought more companies than any other fund type.

“When it comes to hedge funds that have crossed over into growth equity [and] are investing behind trends and themes, these investors are not necessarily picking one company to back,” said Rainey. “They are picking a dozen companies that are following that trend to place their bets, hoping that one or more will emerge as a winner.

“That is a very different growth strategy than other growth investors, like traditional buyouts funds, that typically back an asset and bring a more traditional value creation toolkit to those growth businesses.”