Global Private Equity industry marks yet another solid year

07 March 2016 6 min. read
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The private equity market again booked strong results in 2015 on the back of a strong portfolio and high demand from big money. The peak of the PE cycle exits may have been reached however, as across fundraising, new buyouts and exits, all are down slightly on the previous year – while recent acquisitions have trailed highs booked a decade ago, suggesting that the portfolio for exists in the near term may return to normal levels.

The private equity (PE) market has seen considerable volatility over the past decade, with 2006 heralding a two year deal-making boom before the start of what many thought would lead to the biggest bust in almost a century following the financial crisis. Eight years later however, the PE industry has rebounded from what turned out to be a relatively minor incident for the industry. By leveraging the US Federal Reserve and European Central Bank economic lifeline, which dropped interest rates to almost zero, the industry was able to to refinance many of its pre-recession debts. Relative economic stability and a up pick in equity markets, in combination with piling corporate cash reserves, has of late seen a flood of exits at better than expected rates of return.

Buyout funds
According to a new study by Bain & Company, titled ‘Global Private Equity Report 2016’, 2015 has, following a bumper year in 2014, again shown positive numbers compared to the start of the decade. PE firms have been able to improve their fund raising over the past three years, after a number of depressed years following the recession. Buyout funds raised though remain well below pre-crises levels, with particularly the number of funds above $5 billion seeing considerable contraction, from an average of 10 between 2005 and 2009 to an average of 3.7 between 2013 and 2015. 

The average fund size, outside of the dips following the bust and the 2008 financial crisis bust, have remained relatively stable at around $0.9 billion. Total fund size decreased from $197 billion in 2014 to $175 billion in 2015. This year has seen activity increase – according to the consultancy as it stands 12 large buyout funds, each of them targeting $5 billion or more, are still on the road, looking to raise an aggregate $86 billion. That total was slightly less than one-third of the $256 billion that General Partners (GPs) sought for buyout funds of all sizes but had not yet closed, highlighting the preponderance of mega-funds in the market in 2015.

Buyout activity
The research finds that the global buy-out activity has remained relatively strong relative to 2014, although it is still far behind the boom years of 2006 and 2007. There were mixed results across different regions however, with the Asia-Pacific region experiencing a relative dip in buyout by value, with a CAGR between 2014 and 2015 of -12%. Europe too saw deal value decrease year-on-year by -5%. North America saw increased deal value, up 16% year-on-year. The rest of the world saw considerably more significant growth, with 2015 up 70% on the 2014. Deal volume has seen a slight decrease since 2014, down 14% even while total deal value grew by 5%.

While total deal value stood at $282 billion, the distribution of deals in terms of a range of value categories varied relative to 2014. Last year in particular saw the number of deals in the $5 to $10 billion range increase, up 174% on the year previous. The number of big deals has been trending upwards since 2010, with the 5 year CAGR at 62%. The number of $1 to $5 billion deals saw a large dip between 2014 and 2015, down -12%, although over the past five years the deal value category is up 4%. 2015 also saw the $100 million to $500 million deal category and $500 million to $1 billion categories fall -7% and -3% respectively. The number of small buy-outs <100 million increased considerably, now 12% higher.

Exit activity
Exist activity remained strong in 2015 after a buoyant year in 2014. In total PE firms exited 1,166 companies with a total value of $422 billion. Different regions again showed contrast in the levels of activity, with Asia-Pacific PE funds exiting 20% more companies than in 2014 with deal value hitting $85 billion. In Europe the number of exits dropped 18% between 2014 and 2015, while deal value hit $143 billion in asset sales – an amount surpassed only twice over the past 20 years, in 2014 and in 2007 – the peak of the last PE cycle. North America remained relatively stable in terms of exits at 1%, where buyout-backed exits hit $223 billion. The rest of the world saw the number of exits decrease significantly however, down -70%. In total exit value decreased by -7% while the volume of exited companies dropped -9%.

According to the authors, “Underlying 2015’s impressive exit totals were several notable signs of health. Many GPs took advantage of favourable exit conditions to complete the years-long process of selling off their large inventories of unrealised assets acquired before the global financial crisis. Purchased at peak prices before 2008 and sharply devalued following the market meltdown, these holdings sat in their fund portfolios as GPs patiently rehabilitated them and waited out the recovery.”

The consultancy also looked into the effects of the past on the present, finding that many of the exits over the past year relate to PE portfolio stock that was acquired between 2006 and 2010, at an amount of around $1.8 trillion. Following the resolution of the crisis, between 2011 and 2015, total acquisition value dropped to $1.2 trillion as the number of buyouts decreased in volume, with as a consequence that it is unlikely that the high exit volume can be sustained in the coming years.