The private equity industry is normalising after the financial crisis caused a number of deals to be put on hold, figures show.
The number of buyout deal exits fell 23 per cent in value and 19 per cent in number last year from a year before but the overall health of private equity remains robust, Bain & Co, one of the highest-profile firms operating in the space, said in a new report.
Exit activity was strong, but overall totals for 2016 declined as deals that had been on hold during the global financial crisis were finally digested, the firm said, noting some of the uncertainties created by developments such as Brexit and the US presidential elections last year.
Asset sales of $328 billion in disclosed value from 984 deals "actually constitutes an extremely strong run, helping the industry deliver its fourth-best year ever by value", the firm said in its eighth annual Global Private Equity Report, issued yesterday.
The exit decline was "not reflective of a worsening exit environment, but was driven mainly by a leaner pipeline of deals ready for exit as the industry has largely worked through the backlog of assets invested prior to the global financial crisis," it said.
As this publication has noted, wealth managers, such as private banks and family offices, have pushed up allocations to private equity, and other forms of private capital, because these relatively illiquid assets can offer superior returns in an environment still dominated by low interest rates.
“Given that exits flow from the deals done in previous years, the decline in exit value and count in 2016 wasn’t much of a surprise,” said Hugh MacArthur, who leads Bain’s global private equity practice. “After several years, the industry has finally normalised through the exits of the massive deals done in 2006 and 2007, like a snake digesting an elephant-sized meal. So, while not quite the blowout of 2014 and 2015, last year still delivered an impressive showing overall for liquidity."
Buyout firms are adjusting to a new normal with longer holding periods of about five years – up from the historical average of between three-and-a-half and four years. Bain expects this trend to continue in the medium term, as a result of high purchase prices and limited sources of market beta, requiring general partners to roll up their sleeves and do the time-consuming work of creating value with their assets, the firm said.
Record-high asset valuations combined with stiff competition - particularly from corporate buyers - made it tougher for PE firms to do deals and achieve target returns. Purchase price multiples for buyouts rose to an average of 10.9x EBITDA for US deals in the third quarter of 2016.
"The difficulty of putting capital to work, combined with ongoing investor enthusiasm for the private equity asset class has led to a new record amount of dry powder, now totaling $1.5 trillion across all PE fund types globally – $534 billion of that targeted buyouts," Bain's report said.