PE funds are reaping the rewards of pre-crisis holdings in a year of record buyout-backed exits, with 2014 total exit value reaching $456 billion reports recent research from Bain & Company. While PE funds were looking to profitably offload elements of their portfolios, corporations – seeking to ally shareholder demands and for strategic gain – have used their amassed capital in mergers and acquisitions, while Buyout-backed IPOs too have been trending as exits.
The Private Equity (PE) market has, in contradiction to the doom and gloom projected on the industry after the global credit crunch, enjoyed a relatively boisterous period of activity in recent years. Rather than a protracted period of disruption and default on the back of the sky-highly leveraged post crisis, PE funds were able to take advantage of the near-zero interest rate credit conditions, used to stabilise the financial systems, to refinance their debt. Last year, with robust corporate profits and accommodating IPO conditions, PE funds started to exit profitably on record number.
In a recent report, titled ‘Global Private Equity Report 2015’, global strategy consulting firm Bain & Company explores the state of the Private Equity market, including exits, fund-raising, mergers & acquisitions and investments. The analysis reveals that the number of buyout-backed exits set a record in terms of both deal volume and deal value, with 1,250 sales surmounting the previous peak of 1,219 deals in 2007. The sale value was 67% up from 2013, reaching $456 billion – and far surpassing the $354 billion in 2007. The Asia-Pacific market did particularly strongly, with $53 billion in deal value at a 120% increase on 2013, while Europe saw the buyout-backed exit value more than double from $85 billion in 2013 to $173 billion last year.
From the side of PE funds, the “harvesting of unrealised value on their portfolios continues” – with a superabundance of global capital* sustaining high asset valuations and powering dramatic gains in most regions of the world, making sellers rejoice and buyers cautious. With many of the deals entered into in the boom years of 2005 – 2007 only now being exited, the median length for which a PE fund holding period extended to 5.7 years, up from 3.4 in 2008. 60% of assets were held for more than 5 years and only 10% of exits were ‘quick-flips’, held for less than 3 years.
The reasons cited by the authors for the increase in holding period has been the length of time to make the asset ready for exit, it taking longer to “groom assets acquired at high purchase multiples after the crisis to yield acceptable returns.”
Strategic and IPO entrants
From a functional perspective, the Bain & Company analysis highlights that exits through all channels increased significantly last year, with sales to strategic buyers and IPOs dominating. In terms of corporate activity, impressive cash reserves, access to low interest rates and an easily accessible debt markets have created a lucrative opening for PE-back activity. The motivation to put their means to work comes from shareholder demands for corporations to boost growth and earnings in order to warrant sharply higher share prices; against the backdrop of challenging organic growth in a competitive, low-inflation economy, making strategic mergers and acquisitions an attractive path forward. The 2014 period thereby saw corporations buying 715 PE portfolio companies in 2014—13% more than the year before, with the deal size up 91% on a year earlier to $303 billion.
Another key area activity was the buyout-backed IPO market, with PE funds using IPOs as a means to exit their holdings. Globally there was a 20% increase over the 2013 period, with 210 IPOs. The value of the offerings increased 48% to $86 billion. The PE firms generally selling within or above their target ranges. With Europe seeing buyout-backed IPOs double in both number and value, while the Asia-Pacific markets saw their value almost quintupled, although the $63 billion value was largely the result of the $21.8 billion Alibaba deal.
* Capital superabundance is the product of financial engineering, high-speed computing and a loosening of financial services regulations that supplanted the post– World War II fixed exchange-rate system with a system allowing rapid expansion of capital around the globe. Global financial capital increased 53% from 2000 to 2010, reaching some $600 trillion, and Bain projects that it will swell by half again, to approximately $900 trillion, by year-end 2020.