The newest analysis from Bain & Company about the private equity world contained another positive theme.
In March, Bain said it was already seeing “green shoots” in the private-equity world. On Monday, analysts said the two-year long slump in global private equity looks “finally to be bottoming out, with the industry finding a footing from which to climb back.”
But while private equity activity appears to have halted a freefall, Bain cautioned that it remains subdued by historical standards — especially relative to a $3.9 trillion mountain of available dry powder ($1.1 trillion of this committed but uncalled capital in buyout funds).
“Prospects for revival remain tentative with momentum still scarce,” Bain said in a news release highlighting its Private Equity Midyear Report.
Among positive signals for prospects, Bain’s analysis showed private equity’s precipitous slide in both deal-making and exits over the past two years largely levelled off in the first months of this year.
Globally, Bain indicated private equity’s buyout deal count through May 15 was down 4% on an annualized basis versus 2023, putting it on track to finish the year broadly flat compared with last year’s tally.
Analysts projected buyout deals’ global value is on track to finish the year at $521 billion, up 18% from 2023’s $442 billion — but with the rise driven by a higher average deal size ($916 million, up from $758 million) rather than more deals.
Bain pointed out exits also looked to have halted the steep declines of the past two years.
Analysts said the total number of buyout-backed exits is tracking flat on an annualized basis, while exit values are trending to finish 2024 at $361 billion, registering a 17% rise from 2023 — but still leaving this year shaping up as the second worst for private equity exit values since 2016.
In a further indication of steadily reviving optimism over the outlook, Bain also reported that informal discussions with general partners globally suggest that deal pipelines are already beginning to refill, with many sighting “green shoots” of a recovery emerging.
General partners’ latest observations are more upbeat than in Bain’s most recent March survey of 1,400 private equity market participants that found that 30% did not expect a dealmaking resurgence until Q4 of this year, with close to 40% expecting that to take until 2025 or beyond.
Yet while Bain’s report noted that 2024’s final tally of deal value will likely approach that of the buoyant years before an anomalous post-pandemic spike in 2021, the research suggested that it is too soon to assume a “return to normal,” with a sustained upswing in activity, given the series of key challenges that confront the private equity industry.
“With the year having got off to a better start we’ve been cautiously optimistic about 2024’s outlook. We’re seeing that validated with the data that’s coming through, as well as other indicators, showing that PE is at an important turning point with dealmaking and activity now picking up. So, we see better prospects emerging,” said Rebecca Burack, global head of Bain & Company’s private equity practice.
“But the challenges facing the industry, for example around interest rates, value creation, and especially the exit logjam and the need to respond to pressure to get capital back to limited partners, mean this year will also be an important inflection point in other ways, too, as general partners look to get the wheel spinning once again,” Burack continued in the news release.
Adjusting to the ‘new normal’
Bain’s Private Equity Midyear Report also used a term that’s been common in conversations, especially since the pandemic.
Analysts mapped out an array of critical challenges that private equity players are under pressure to address urgently, from prolonged uncertainty over the macro-economy and interest rates that look set to stay higher for longer, to continuing geopolitical turbulence, to the sector’s exits gridlock.
Bain suggested that private equity firms need to move quickly and decisively to adapt to a changed market, rather than expect a rapid resumption of business as usual, as seen before the market slowdown over the previous two years.
“The imperative is to adjust to the ‘new normal,’” said Hugh MacArthur, chairman of the global private equity practice at Bain & Company. “It typically takes 12 months or more for a boost in exits to produce a turnaround in fund-raising — so even if dealmaking picks up this year it could take until 2026 before the fundraising environment really improves.
“So, in a hotly competitive market for capital, PE firms needs to make decisive moves to change the narrative. They need to use this time to take a clear look in the mirror and understand how LPs really see their fund and then to translate those insights into stronger performance and more competitive positioning,” MacArthur continued in the news release.
“Importantly, that includes sharpening value creation — in an environment of higher rates the premium is going to be on producing margin and revenue growth in portfolio businesses,” he went on to say.
Exit gridlock persists
Bain mentioned the continuing “deep freeze” afflicting private equity exits is a critical area of pressure highlighted in the report.
Analysts found that the continued low level of exits, leaving private equity firms sitting on trillions in unsold and aging assets, is making life increasingly uncomfortable for general partners in multiple ways.
Perhaps most crucial, Bain noted that the prolonged slump in exits is preventing the return of capital to LP investors that are increasingly pressing for a rise in current low levels of distributed-to-paid-in capital (DPI).
In turn, LPs’ dissatisfaction over distributions is impeding new fund-raising with investors focusing new commitments on a narrower swath of favored funds, according to Bain.
A recent poll by the Institutional Limited Partners Association showed only a small minority of LPs were satisfied by the urgency GPs are placing on increasing liquidity.
Bain reported the impact on fund-raising means that the environment for private equity to secure new capital remains “a tale of haves and have-nots.”
Through May 15, Bain determined the industry raised $422 billion versus $438 billion over the same period last year.
Analysts computed the trend suggests fundraising will reach an annualized $1.1 trillion in 2024 — marking a 15% drop from the previous year.
Bain said buyout funds are dominating the fund-raising landscape , with $199 billion raised up to May 15, and the category set to reach a tally of $531 billion by year-end, a 6% rise from 2023’s total.
Bain also highlighted that while the overall fund-raising figures look relatively robust, LPs’ increasing focus on a narrowing swath of favored fund managers means that in buyouts the 10 largest funds closed took in some 64% of total capital raised so far this year, with the largest single fund (the $24 billion EQT X fund) accounting for 12%.
“As a result, the bulk of buyout funds are left to battle over the remaining 36% of capital available and at least one in five buyout funds is closing under its target,” Bain said.
“One brighter spot for exit prospects is a reopening of the initial public offering market, sparked by a surge in public equities over the past six months that has also relieved some liquidity pressures on LPs,” analysts continued. “But while a revived IPO market has produced several large exits in Europe, the report adds that IPO exit channel still represents only a sliver of exit totals, with the corporate deals and sponsor-to-sponsor exit channels still largely flat.”
What else is making dealmakers cautious
Bain touched on a few other ingredients that are holding back private equity activity.
Persistent macro-economic and geopolitical uncertainties, with still-elevated global interest rates that may not be lowered as much as expected this year, also remain a persistent drag on PE’s revival prospects, according to Bain.
Analysts noted that still-elevated rates are keeping dealmakers cautious, distracted, and wary on either side of transactions, while also aggravating the challenge of managing rate-related issues within existing portfolios.
“Interest rates that have stayed higher for longer have also raised the stakes for funds in holding assets over longer periods in the face of the declining exits,” Bain said. “Balance sheets have come under pressure from the increased cost of debt financed by adjustable-rate loans so that portfolio managers are spending increasing time in negotiation with lenders and managing operational issues, with this then acting as a brake on new dealmaking activity.”
Against this backdrop, and with a full-blown revival in fundraising and overall PE activity likely to take a number of months to come through, Bain’s analysis advocated for firms to implement determined action to fully understand their LP investors’ expectations and needs and to develop a comprehensive plan across their portfolios to meet those requirements and deliver value.
