Bain: Global buyout backed exits reaches 456 billion

24 March 2015 Consultancy.uk

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.

The number and value of buyout-backed exits hit new records in all regions in 2014

Buyout-backed exits
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.

In 2014 - fewer than 10% of exits were quick flips of assets held less than three 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.

Buyout-backed exits increased across all channels in 2014

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.

The rapid growth of financial capital has shaped the global economy

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Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.