Study: Private equity markets plateau in 2012(2)

Global deal volume remains relatively stable despite a $1tn dry powder load at the beginning of the year and readily available credit for leveraged buyouts.

Despite favorable credit markets and a surplus of available investment capital (read: dry powder), private equity deal volume remained relatively flat in 2012, according to a Bain & Company global private equity report scheduled to be released this week. 

“Based solely on the top-line numbers for the past year, the PE industry looked to be stuck in a rudderless recovery through the end of 2012,” according to the report. Total deal volume totaled $186 billion this year, “a disheartening figure considering that over the past decade both the number of active PE firms and the amount of dry powder committed for investment had more than doubled.”

Bain estimated that fund managers had approximately $1 trillion to put the work at the start of 2012. 

The PE industry looked to be stuck in a rudderless recover through the end of 2012.

Bain & Company

While private equity deal activity in the US fared well, the numerous economic crises plaguing European economies and concerns over a possible slowdown of some Asian markets kept global deal volume flat for the third straight year, according to the report (global investment in 2010 and 2011 totaled $188 million and $182 million respectively). 

Fundraising for new private equity funds also remained relatively unchanged, according to Bain. GPs tallied $321 billion in commitments in 2012, slightly more than the $312 billion raised the previous year. The study notes that this had been expected; an LP survey conducted by Preqin in late 2011 indicated that approximately half of respondents would maintain a similar private equity commitment pace in 2012. 

Even as commitment levels remained steady, the fundraising market is still divided between the haves and have-nots. Unsurprisingly, firms with consistently strong track records and experienced management tended to fall in the former category. 

“Fund-raising in 2012 was sharply bifurcated, with a very small minority of GPs reaching their targets quickly and with seeming ease, while the vast majority of PE firms were forced to work harder than ever to achieve their goals,” according to the study.

If a surge in commitments were to occur, it would likely follow an improvement in exits, which facilitate distributions

Fund-raising in 2012 was sharply bifurcated.

Bain & Company

to LPs. Global buyout-backed exit volumes fell by 18 percent to $218 billion in 2012. Inconsistent distributions have put pressure on institutional investors’ allocations to the asset class, which remain tied up in large commitments to pre-2008 vintages that have struggled to deliver exits amid limited opportunities for IPOs. 

For example: “CalPERS and CalSTRS had between 1.3 and 1.5 times their paid-in capital returned to them from the PE fund investments they made prior to 2005. But the two have only gotten back less than 0.4 times the capital they paid into the big fund vintages of 2005 through 2007,” according to the study. This has limited the retirement systems’ ability to deliver new commitments to fund managers. 

Some optimism

Even as both fundraising and deal activity has plateaued, Bain’s study did find some areas where industry players should be optimistic. With a substantial amount of dry powder still available and concerns surrounding the general economy abating, general partners will likely put a considerable amount of capital to work in the coming year, particularly as credit markets have continued to offer favorable rates to finance leveraged buyouts in the US and Europe, according to the study.

The availability of credit has led to growing leverage rates on corporate deals in the US; leverage levels spiked from “an average multiple of 4.9 times EBITDA …  to 5.7 times between the second and third quarters of the year”, according to the report. 

Higher multiples, along with a competitive market for buyers, could be good news for fund managers seeking to unload assets from pre-crisis vehicles, which in turn would help facilitate fundraising in the coming year.

“The clouds of uncertainty about the economic prospects for the key economies where PE is active have begun to lift,” according to the report. “One harbinger of better things to come was the announcement in early February that Michael Dell would pair up with Silver Lake Partners to take Dell Computer private in a $24.4 billion buyout, the largest LBO since the boom years.”