Global private equity is poised for a resurgence this year, following a slowdown in deal-making in the middle of 2022, according to the 14th annual Global Private Equity Report released on Monday by consultant Bain & Co.
Bain said in the report that the weakness in private equity in the second half of 2022 was due to economic turmoil and higher interest rates imposed by central banks in response to climbing inflation.
Now, despite steep declines witnessed in transactions, deal values and fundraising in 2022, the underlying fundamentals of private equity are still strong and resilient, Bain said in the report, citing, among other things, that the sector has some $3.7 trillion in dry powder ready to be deployed.
Bain's report also pointed out that despite the difficulties encountered by private equity in late 2022, last year was still the second strongest in private equity's history.
The report noted that after posting a record high in 2021 of $1 trillion in completed deals, that figure plunged about 35% to $654 billion in 2022. The overall deal count fell by 10% with some 2,318 transactions completed last year.
Global fundraising in 2022 dropped 10% to about $1.33 trillion from the prior year due to "deteriorating conditions and confidence," the report noted. However, Bain added that the 2022 total fundraising figure was still "the second highest ever."
The fall-off in deal activity and value in the second half of 2022 was especially prominent in the Asia-Pacific region due to market shutdowns caused by COVID-19 restrictions.
Bain's report also found that the reluctance of banks to lend to large leveraged transactions since the middle of 2022 also cut into deal-making activity. Indeed, across the U.S. and Europe, leveraged loans plunged by 50% to $203 billion last year. As a result, the private equity industry saw a decline in the kind of large, high-leverage transactions that have supported deal values for years. As such, the average deal size dropped by 23% in 2022 to $964 million, after climbing consistently since 2014 to reach a record high in 2021 of $1.2 billion.
Deal exits also dropped sharply in 2022, Bain noted. Buyout-backed exits fell by 42% to $565 billion in 2022, while growth equity exits plunged by 64% to $312 billion. These declines reflected the "complete shut-down of the IPO market amid sharp falls in public equities, as well as a drop in sponsor-to-sponsor deals by 58%," the release noted.
In addition, the report noted, private equity has the potential to become even more attractive to investors discouraged by the relatively poor performance last year of both the public equity and debt markets.
Bain further noted that despite the market turbulence of 2022, the current economic climate is unlike the global financial crisis of 2007-2008 when the banking system nearly collapsed.
"So far this year there has been a continuing slowdown in the action, but private equity's long-term appeal to investors is secure," said Hugh MacArthur, chairman of the global private equity practice at Bain, in a news release issued along with the report. "As deal activity begins to pick up in 2023, the industry continues to be well positioned for long-term growth."
Mr. MacArthur added: "There is undeniable uncertainty in the global market — but this is something private equity has dealt with and persevered through before."
Bain's report indicated that leading players in the industry will continue to find deals that they can underwrite and will remain aggressive.
"While there is obvious disruption in markets, dealmakers can adjust to do deals that work in a range of conditions," said Rebecca Burack, head of the global private equity practice at Bain, in the release. "The best will do just that, even with lower levels of activity broadly. Winners will stay close to their proven sweet spots. Critical to their success will be underwriting dealmaking where their expertise and confidence are highest. We've seen from past periods of dislocation that investors who follow this strategy have generated very strong returns — so staying in the game is important for all of the industry's stakeholders."
Bain's report also cited that individual investors — who account for one-half of global asset wealth — will likely help spurt more growth for private equity. Bain found that individual retail investors hold an estimated $275 trillion to $295 trillion in global assets, but only 16% of that capital is held by alternative investment funds. As such, retail investors represent a vast, largely untapped market for private equity managers.
Bain concluded in the report that "amid the short-term gloom, there is nothing to suggest the long-term outlook for private capital is any less positive than it was in 2021."