Global Private Equity industry marks yet another solid year

07 March 2016

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.


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Private equity firms ramp up sustainability focus

19 April 2019

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.