PE Funds Challenged to Deliver Healthy Returns in ‘Frothy’ Environment: Bain

The global private equity industry enjoyed increasing investment, strong exit markets, healthy returns and robust fund-raising activity in 2017, according to a new report from Bain & Company.

But this good news has a downside. It has attracted so much capital “that the industry’s structural challenges have sharpened,” Bain’s head of global private equity Hugh MacArthur writes in the report’s introduction.

“If it’s possible, fund-raising has been too good, with an unprecedented $3 trillion raised over the past five years.”

The report said global buyout value grew 19%, to $440 billion, supported by a stream of large public-to-private deals. At the same time, global deal count has fallen substantially since 2014. Last year, it grew by just 2%, to 3,077 deals, off 19% from the 2014 high-water mark for deal activity in the current economic cycle.

Put another way, funds have tons of money to spend, but not enough appealing targets on which to spend it.

Multiples are at all-time highs, with around half of all companies acquired priced in excess of 11 times earnings before interest, taxes, depreciation and amortization.

Given this “frothy” environment, Bain’s report looks at how the private equity industry is responding to the current situation.

For one, firms are using a mix of tactics and strategies. Tactically, they are assessing and measuring portfolio management talent.

In addition, they are trying to get a handle on how rapid technological change is altering industry profit pools, so they can be first to take advantage of new opportunities and avoid pitfalls prior to investment. Although firms’ approach to assessing risks and opportunities over a typical holding period remains unchanged, they still need new tools to understand how technology affects industries, as evidenced by the rapid ascent of Amazon and its widespread effects.