‘Superabundance’ of capital causes headaches for PE

Acquisition multiples reached ‘record or near-record highs across the US and Europe’ in 2016, according to a report from consulting firm Bain.

Deal and exit value fell last year, while the mountain of undeployed capital – dry powder – hit a record high, according to Bain & Co.

Dry powder hit a record high of $1.5 trillion, the consultancy wrote in its Global Private Equity Report 2017. The figure could be as high as $1.8 trillion if shadow capital in the form of co-investment and co-sponsorships is included, the report noted.

“Capital superabundance and the tide of recent exits drove dry powder to yet another record high in 2016,” Hugh MacArthur, Bain’s head of global private equity, wrote in the report. Coupled with expectations that debt will remain affordable, deals won’t be getting any cheaper, MacArthur added.

Demand for buyout vehicles remained strong, with fundraising for the strategy jumping 20 percent to $221 billion following two years of decline. Megabuyout funds – vehicles raising more than $5 billion – led the charge, with more than 40 percent of all capital raised for buyouts going to just 11 such funds.

Megabuyout funds that closed last year include Advent International’s Advent International GPE VIII on $13 billion; TPG’s TPG Partners VII on $10.5 billion; and Leonard Green & Partners’ Green Equity Investors VII on $6.5 billion, according to PEI data. Such funds appeal to LPs who want to put massive amounts of capital to work in private equity, as well as those wanting to limit their number of funds and external relationships, Bain’s report noted.

Carlyle, KKR, Apollo and Blackstone have around $96 billion in dry powder between them, according to PEI analysis of the firms’ most recent annual financial reports. Around half of this – $43 billion – is at Blackstone’s disposal, while KKR has around $22 billion, and Carlyle sits on around $17.5 billion. Apollo, which has $14 billion in undeployed capital, is anticipating a “meaningful close” this year on its ninth flagship fund, which has a target of $18 billion.

While capital raising across all strategies dipped slightly to $589 billion, Bain’s report notes private equity has raised well in excess of $500 billion annually for the past four years, demonstrating healthy appetite among investors. This figure does not include capital in separately managed accounts, which has more than doubled over the past decade and accounted for almost 6 percent of private capital raised last year.

Global deal value slipped to $257 billion after three years of increases, as high asset valuations and fierce competition from corporate buyers, amid macroeconomic and political uncertainty in various regions, made deal-making challenging.

“Corporate buyers, flush with cash, remained willing to pay a premium for assets that would expand their reach or create synergy,” the report noted, adding that acquisition multiples reached record or near-record highs across the US and Europe, at more than 10 times EBITDA in both regions at the start of 2016.

North American buyout activity fell by 16 percent by value and almost a quarter by deal count year on year, while in Europe GPs fought economic and political headwinds throughout the year, with deal value slipping just 10 percent and deal count dropping 11 percent.

In Asia-Pacific, private equity deals overall fell by more than a quarter by value and 14 percent by number of transactions after a record high year in 2015.

Despite a drop in some metrics, the industry had its fourth-best year ever, with asset sales of $328 billion in disclosed value from 984 deals constituting an “extremely strong run” of exits.

“GPs worked hard to keep their preferred status, finding and executing on good deals while rolling up their sleeves with portfolio companies to create value and successful exits,” the report noted.

Toby Mitchenall contributed to this report.