Macro uncertainty a ‘deal killer’ for private markets – Bain & Co report

Last year saw a fall-off in deal activity; whether this persists in 2023 will be determined by how macro forces stabilise, says Bain & Co’s global PE chief.

Macro uncertainty remains a “deal killer” in private markets investing, yet signs of a modest recovery are slowly taking shape, Bain & Company’s Global Private Equity Report 2023 has found.

“We’re starting to see that banks are starting to get interested in coming back to the table. Buyers and sellers are beginning to be a bit more optimistic about the future economic landscape. And certainly, for assets that are not highly cyclical – some assets in healthcare, tech and industrials – those may be tradable again,” said Hugh MacArthur, global private equity practice chairman at Bain & Co.

“That modest recession – if there is a recession – is giving people some confidence that we can get back to doing deals again,” he told Private Equity International.

MacArthur added that he is more “glass half full” in expecting a recovery. “Back in 2008, there were things that were fundamentally broken in the macro economy, that wherever you stood as a dealmaker or an LP or another stakeholder in the industry, you could see that it was going to take years to work through the issues that we had.”

He continued: “Right now, we don’t have any of that. No banks are insolvent; corporate earnings and employment numbers remain pretty good. Consumers are still spending for now. GDP growth is still positive. Unless there’s a black swan event that’s going to come in, dealmakers we talk to are starting to tell us: ‘We could work through this. And by mid- or back half of the year, we could be back into buying and selling, and that will allow us to get back into the fundraising business with our LPs.’”

2022 was a year of two halves: deal activity and capital raising were in supersized mode until June, after which macro forces caught up – including inflation, rising rates, the Russian invasion of Ukraine and the energy crisis – to topple year-end totals.

Dealmaking and exits slowed through the second half of the 2022, per Bain’s report. Global buyout deal value excluding add-on acquisitions fell 35 percent year-on-year to $654 billion, while overall deal count slipped 10 percent to 2,318 transactions. In particular, dealmaking slowed substantially in Asia-Pacific as China grappled with shutdowns due to its zero-covid policy.

Deal activity also slid across sectors globally, although technology remained a bright spot, representing nearly 30 percent of all buyout deals. Leveraged loans dropped 50 percent to $203 billion as acquisition financing became more expensive and impacted the number of large leveraged buyouts getting done, according to the report. The average deal size also fell 23 percent to $964 million, from a record high of $1.2 billion in 2021.

Exits were also down year-on-year as IPO markets shut down in 2022. Buyout-backed exits slid 42 percent last year to $565 billion, from $969 billion in 2021. Growth equity exits fell even further, dropping 64 percent year-on-year to $312 billion.

Additionally, capital raising was significantly hit. Buyout fundraising across all regions totalled $347 billion – $66 billion less than the previous year. The total number of buyout funds also fell 43 percent in 2022 as LPs backed the more experienced managers, the report noted. Across private capital strategies, $1.3 trillion was raised by managers, a 10 percent decrease from 2021’s nearly $1.5 trillion.

“While the long-term outlook for fundraising remains exceedingly bullish, the environment for attracting capital in 2023 will be considerably less so. For a variety of reasons, LPs are tapped out, and the cash squeeze they are facing will make it difficult to ramp up commitments in the coming months,” according to the report.

Individual investor access

Private assets will become more much relevant to retail investors over time, MacArthur noted. However, a number of challenges including regulation, investor education, valuations and liquidity still need to be overcome.

“It’s going to happen, and it’s going to happen at scale,” MacArthur added. “The reason for this is that the alternatives investors themselves want the access to the capital because they’re struggling with a lot of the non-sovereign wealth fund institutional capital. And retail investors themselves want access to something more than… thinly traded public markets.”

Individual investors hold roughly half of the estimated $275 trillion of global assets under management, yet just 16 percent of their assets are held by alternatives funds, according to Bain’s analysis.

Individual wealth in alternatives is projected to grow 12 percent annually or up to $13 trillion over the next decade, from $4 trillion in 2022, Bain estimates.

MacArthur noted that private markets will need liquidity mechanisms – which do not currently exist at scale – if it expects to open access to millions of retail investors.

“There’s also a huge amount of education that’s going to be required. That needs to be provided by whoever is selling the product, whether it’s the person that created the product or a traditional asset manager or a digital platform.”