Global private equity remains set for further strong, long-term growth even in the face of a sudden reversal in 2022, driven by economic turbulence and uncertainty amid rising inflation and interest rates, Bain & Company’s 14th annual Global Private Equity Report, released today, says.

The report emphasises that last year was still the second strongest in private equity’s history, despite an abrupt mid-year derailment of dealmaking, exits and fund-raising, triggered by a series of interest rate hikes by the US Federal Reserve in response to sharply higher inflation.

While the setback from June, after unprecedented macro shocks, conspired to slow dramatically what had been a decade-long, consistent and attractive run for the PE industry, the Bain study finds that the sector’s underlying fundamentals remain strong and resilient. The report also points to the potential for the PE sector to become even more appealing to investors chafing at the limitations of public markets, despite the shifting economic tides.

Bain concludes that unlike the period from 2007-08, when the global banking system came close to collapse, nothing is fundamentally broken in the underpinnings for PE’s future expansion and current conditions are nothing the industry hasn’t dealt with successfully before.

“So far this year there has been a continuing slow-down in the action, but private equity’s long-term appeal to investors is secure,” said Hugh MacArthur, chairman of the global Private Equity practice at Bain & Company. “As deal activity begins to pick-up in 2023, the industry continues to be well positioned for long-term growth. Despite the drop-off in deal, exit, and fund-raising activity, 2022 was still the second-best year in history. There is undeniable uncertainty in the global market, but private equity has dealt with and persevered through this before.”

Examining present and future challenges for the industry, Bain’s analysis highlights that clear strategic “sight lines”, rather than economic conditions, are what will bring energy back to dealmaking even if interest rates remain higher for longer.

Noting that the industry ended last year with a record $3.7 trillion in dry powder, the report emphasises the lessons from the last downturn, during which investors didn’t panic but focused instead on risk management and mitigation to set themselves up to accelerate out of the weaker period.

Rapid reversal from record highs in 2022

Bain’s report charts the course of 2022’s far-reaching economic and geopolitical turbulence and its impact on the PE sector, which it finds bore the brunt of macro headwinds.

After marking new record highs in 2021, with completed deals worth $1 trillion, capping a stunning 12-year long upcycle for the industry, 2022’s sudden mid-year break in PE activity saw global buyout value (excluding add-ons) drop steeply, by 35%, to $654 billion last year. Overall deal count, meanwhile, tumbled by 10% with some 2,318 transactions completed.

Banks’ reluctance to lend to large leveraged transactions from mid-year as interest rates rose and economic anxiety intensified dictated how dealmaking ultimately unfolded in 2022, Bain notes. Across the US and Europe, leveraged loans fell 50% to $203 billion.

The result was a decline in the sort of large, high-leverage transactions that have for years buoyed deal value so that average deal size fell by 23% over 2022 to $964 million after having climbed steadily every year since 2014 to achieve a record high in 2021 of $1.2 billion.

Bain’s analysis also finds that the 2022 PE reversal also hit growth equity and late-stage venture investment – segments that were previously on fire. Overall deal value in these segments dropped 28% to a rounded $644 billion.

Deal exits fell even harder than investment activity, Bain’s analysis shows. With every channel for exits in decline, buyout-backed exits dropped by 42% to $565 billion while growth equity exits plummeted by 64% to $312 billion. The falls reflected the complete shut-down of the IPO market amid sharp falls in public equities, as well as a drop in sponsor-to-sponsor deals by 58%. Sales to strategic buyers were higher than the five-year average, largely due to corporate earnings’ resilience, but still ended 2022 some 21% down on the prior year.

Gregory Garnier, Partner at Bain & Company, said: “We believe that the outlook for PE fund-raising remains exceedingly bullish. New fundraising last year was also affected by the deteriorating conditions and confidence, dropping 10% from 2021’s levels to $1.3 trillion – still the second-highest figure on record. Despite all of the past year’s declines in dealmaking, exits, and fund-raising, Bain’s analysis suggests the long-term outlook for private equity remains one of resilience and expected resurgence even though a turnaround in macro conditions is impossible to predict with accuracy. In that market context, institutional investors such as Middle East Sovereign Wealth Funds are a source of stability and play an increasingly important role globally both as a LP but also as a direct investor.”

He added: “The study explores some of the key sector trends and themes set to be important for further growth across the PE industry.”

Individual investors to be PE’s next growth engine

Individual investors and their wealth are expected to be the new great growth engine for PE, Bain reports. It finds that with individual retail investors holding roughly 50% of all global assets under management (estimated to total $275 trillion to $295 trillion) but with only 16% of the capital held by alternative investment funds, this segment represents a vast, untapped market for PE managers seeking to sustain double-digit growth as the industry matures.

Bain finds that funds that are already exploring retail investment markets are moving quickly and that this is forcing the rest of the industry to make choices on whether to “get in the game” and on their positioning.

PE must pivot to organic growth

The emerging combination since 2022 of higher interest rates and inflationary pressures pose a twin threat for PE and general partners, Bain’s report emphasises.

While the analysis notes that predicting the uncertain course of prices or inflation is foolhardy, it notes that a series of powerful factors that are in play do remain certain – including ageing populations, government budget strains, and rising material costs due to the global supply chain crunch and trends to onshoring. The study concludes that these trends mean that the past, historically unprecedented period of zero-to-negative interest rates is over so investors should assume higher interest rate risk.

In turn, the report finds this creates a new imperative for private equity to create value through margin improvement and organic growth.

Bain’s report concludes that for PE firms winning in this challenging environment will require finding ways to adjust to these new macro pressures including through investment in automation, in supply chain redundancy and security, and via managing balance sheets against the risk that interest rates may be “higher for longer”. PE players should also look to target customer groups and industries with lower price sensitivity.

Global energy transition

The global energy transition away from carbon-based fuels in pursuit of net-zero, and the increasing impact of web3, despite present hype and turmoil in the crypto world, are two other important areas of challenge and opportunity for private equity examined in detail in the Bain report.

Karen Khalaf, Partner at Bain & Company, added: “The analysis we ran highlights that pressure on PE firms to decarbonize portfolios only intensified in 2022, with regulators, consumers, B2B customers, and investors are stepping up calls for change. At the same time, Bain & Company notes, the race to develop new alternative energy sources and other low-carbon solutions is shaping a generational opportunity to put capital to work. The energy transition will need trillions in new capital, the report emphasizes. While ambiguity around regulation, the pace of change, politics and other issues will persist, we suggest that PE and its GPs cannot let such uncertainty deter action. Rather, firms need to develop experience, hone capabilities and nurture the networks that will allow them to turn change to their advantage.”

Private equity should also rise to the challenges posed by web3, Bain finds. Despite the present ‘crypto collapse’, the broader technologies behind crypto, collectively known as web3 are here to stay and will continue to drive far-reaching impact for business and across markets, the report says. 

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