PRIVATE EQUITY REACHED NEW HIGHS IN 2021 AS AVERAGE DEAL SIZE SURPASSED THE $1 BILLION MARK FOR THE FIRST TIME |
BOSTON, March 7, 2022 /PRNewswire/ — Private equity set a remarkable new standard for itself in 2021. The buyout deal value hit an all-time high of $1.1 trilliondoubling the 2020 total of $577 billion and smashing the previous record of $804 billion set up in 2006 during the exuberant rise of the global financial crisis. Transaction size, not transaction count, was driving the increase. The number of transactions greater than $1 billion nearly doubled in 2021, with the average deal size reaching $1.1 billionincreasing by 57% to break through the $1 billion score for the first time.
One of the reasons for the surge in deal value last year is the sheer volume of capital in the market. After 10 years of steady growth, dry powder set a new record in 2021, rising to $3.4 trillion worldwide, with approximately $1 trillion of that sitting in buyout funds.
The ability to put large amounts of capital to work has produced a sudden and marked increase in public-private (P2P) transactions, especially in North America and the Asia Pacific Region. These private transactions absorbed $469 billion in capital worldwide, an increase of 57% year-on-year, and were largely responsible for the record total value of 2021. The last time the market produced such an increase in P2P transactions was at the approach to the global financial crisis of 2006-2007. The key differentiator of today’s P2P offerings is their small size. Today’s P2P deals are often entered into by one or two buyers with deep industry expertise, unlike the buyer consortia required for large deals we saw in 2006-07.
By rapidly deploying large amounts of capital over the past three years, buyout firms have seen their share of global M&A activity soar to 19%, its highest level since 2006.. The push, however, came at a cost: average redemption multiples in 2021 rose to 12.3x in North Americaand 11.9x in Europe.
The rising price level in the industry may also reflect the bet that more investors are making toward specialization, particularly on technology-fueled growth. One in three buyouts now involves a technology company. Continued growth in sectors such as fintech, healthcare and business services – where outperformance is increasingly a function of technological expertise – means that technology is now a key investment thesis in more than half of all business activity.
In addition to investments, outflows also hit new highs, with every outflow channel being about as attractive as it could be in 2021. Overall, buyout funds have been unloading $957 billion assets globally, more than double a strong 2020 total and 131% above the five-year average. Special purpose acquisition company (SPAC) transactions were particularly notable, increasing 325% over the previous year and reaching $158 billion.
These are among the findings of the 13th annual Bain & Company Global Private Equity Report, published today. Bain & Company is the world’s leading private equity investor advisory firm.
“Given the high prices paid in 2021, there will inevitably be increased pressure on deal sponsors to deliver results this year,” said Hugh MacArthur, Global Head of Bain & Company’s Private Equity practice. “The chances of success are highest for companies with a long history in an industry. To generate returns during this high-tension period, it is essential that traders fully understand the microeconomics of the industry, the levers of value creation available to shoot and the risks they write.”
Private equity continued to offer investors in 2021. Buyout funds have, on average, generated a higher common net IRR than public markets, providing broader exposure, less volatility and better returns over time. time. 95% of LPs surveyed by Preqin in Q4 2021 said their PE portfolio performance has met or exceeded their expectations over the past year, although some predict a bit of a cooling in the coming year .
Fundraising completed last year’s list of record measures. Global funds raised across the private equity spectrum have been impacted $1.2 trillion, the highest level ever achieved. Buyout Funds Raised $387 billion in 2021, their second best year ever. Investor enthusiasm for private equity shows no signs of waning. Nearly 90% of LPs surveyed by Preqin in 2021 said they plan to increase or maintain their private equity allocations this year, and 95% said they will do so in the longer term.
“While the conflict in Ukraine removes a dimension of uncertainty around the global macro picture, it adds many new ones,” MacArthur said. “The ripple effects of Ukraine the conflict will be felt from afar. The most obvious impact will be on oil and gas supplies, which now face political and physical risks. Amid the chaos, investors will be challenged to gain conviction around a most likely scenario. Instead, private equity investors and their portfolio companies will need to plan for a wider than normal range of scenarios and closely monitor how events unfold.”
This year’s Global Private Equity Report explores key themes to watch in 2022, including pressures on ESG (environment, social and governance) metrics, a shift towards trading in Asia and the growing challenge of inflation.
Closing the ESG measurement gap
As more and more LPs and GPs look for ways to implement meaningful ESG strategies, they inevitably encounter a measurement gap that makes it difficult to assess success. The lack of specific data standards and best practices related to ESG hampers the ability of investors to consistently assess the ESG performance of their equity portfolios. These challenges emerge from a survey of LPs jointly conducted by Bain and the Institutional Limited Partners Association (ILPA). Around 70% of LPs have integrated ESG into their investment policy. Of these, around 85% have a specific ESG policy related to private equity allocations, and these policies affect around 76% of their private equity assets under management. 93% said they would back out of an investment if it posed an ESG issue.
Capturing the next wave of software growth
Private equity investors closed $284 billion in technology deals in 2021, 90% of which were software deals. Investor appetite for B2B software and technology is only growing as the performance of these investments speaks for itself. While fast-growing technology companies are generally associated with higher risk, mature or mature enterprise software companies that private equity has turned to have actually proven to be less risky and volatile than others. investments. Software outperformed other private equity investments, with around 60% of deals returning 2.5 times or more, and with fewer write-offs than other sectors.
The challenge of PE inflation
A new factor has emerged in 2021: inflation, which has reached levels not seen in the United States and other markets in 40 years. However, transitory as this inflationary period may be, the reaction of the Federal Reserve and other central bankers will shape current and future transactions. One thing is certain: Inflation playbooks are now growing across the GP and LP landscape as investors rush to protect margins and future returns.
The report also examines the impact of the growing volume of assets under management in growth stocks, the growing importance of sector specialization and best practices in technology due diligence.
About Bain & Company’s Private Equity Practice
Bain & Company is the leading advisory partner to the private equity (PE) industry and its stakeholders. PE consulting at Bain has grown eightfold over the past 15 years and represents approximately one-third of the company’s global business. We maintain a global network of over 1,000 experienced professionals serving PE clients. Our practice is more than triple the size of the second largest advisory firm serving private equity firms.
Bain’s work with private equity firms spans fund types including buyout, infrastructure, real estate and debt. We also work with hedge funds, as well as many of the largest institutional investors, including sovereign wealth funds, pension funds, endowments and family investment offices. Bain & Company supports clients with a wide range of objectives, including deal generation, due diligence, immediate post-acquisition and ongoing value creation, exit planning, corporate strategy and operations. and the strategy of institutional investors.
About Bain & Company Bain & Company is a global consultancy that helps the world’s most ambitious changemakers shape the future.
Across 63 offices in 38 countries, we work alongside our clients as one team with a common ambition to achieve extraordinary results, outperform the competition and redefine industries. We complement our integrated and personalized expertise with a vibrant ecosystem of digital innovators to deliver better, faster and more sustainable results. Our 10-year commitment to invest more than $1 billion in pro bono services brings our talent, expertise and knowledge to organizations tackling today’s pressing challenges in education, racial equity, social justice, economic development and the environment . We have achieved a gold rating from EcoVadis, the leading environmental, social and ethical performance rating platform for global supply chains, placing us in the top 2% of all companies. Since our founding in 1973, we have measured our success by the success of our customers, and we proudly maintain the highest level of customer advocacy in the industry.
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