The global private equity (PE) industry finished its strongest five-year stretch for fund-raising in the industry’s history, according to a recent report from Bain and Co.
According to the report, large sums of cash continued to flow into private equity throughout 2017, as the $701 billion of private equity capital raised worldwide nearly matched the record set the previous year. Buyout funds led the asset class, increasing 27% from 2016 to capture $301 billion. The report also found that the10 largest funds closed during the year all raised more than their targets.
“This is both a blessing and a curse,” said Hugh MacArthur, global head of Bain’s private equity practice, in a release. “Funds have ample money to spend, but the competition for deals is fierce. With deals being done at record-high multiples, the right sort of diligence is more essential now than ever before.”
Bain said that at the end of 2017, buyout funds were sitting on an all-time high of $633 billion in uncalled capital ($286 billion of which was in mega buyout funds), with totals rising at 12% compounded annually for the past five years. It also said that reducing “the massive overhang” of uncalled capital will require more deals and larger ones at that.
In 2017, more than 38,000 companies were bought and sold globally, at an estimated value of $3.3 trillion. However, private equity’s share was just 13% by value, and 8% by deal count.
“This structural imbalance is, without doubt, the industry’s biggest challenge, stemming from heavy competition for deals, which puts persistent upward pressure on asset prices,” said MacArthur. “In the coming years, this, along with heavy competition and the looming threat of an eventual economic downturn will require PE funds to create portfolio company value from the inside out—through better leadership and execution—or accept middling returns.”
MacArthur added that there could also be more M&A-based deals, “including buy-and-build transactions that continue to be a staple of deal-making as well as more, bold, large-scale M&A.”
Other figures released in the report include:
- Deal value increased 19% to $440 billion in 2017.
- Global buyout deal count was up just 2% to 3,077 deals, which is 19% below the record level for deal activity in 2014.
- General partners sat on $516 billion earmarked for buyouts at the start of 2017.
- Buyout-backed exit value came in at $366 billion, the third-highest ever, while exit count rose 3%.
- The median holding period for buyouts was unchanged at five years.