Bain: Private Equity Set to Rebound, With Caveats

(March 21, 2011) – A Bain & Company report is claiming that private equity firms, sitting on billions of dollars of dry powder, are poised for a strong 2011 – with some caveats.

In its Global Private Equity 2011 Report, management consulting firm Bain predicts that the “nearly trillion dollar stockpile of un-invested capital” makes it likely that private equity firms, looking to put capital to work, will increase deal-flow in the coming months. However, in a release, the firm stated that the “positive trend is somewhat tempered by the fact that approximately one-quarter of the $434 billion of the dry powder targeted for buyouts is ‘pressured capital’—committed capital in the hands of GPs with powerful incentives to return profits to limited partners (LPs) and extend the life of their firms—which may cause some pressured firms to overreach in their deal-making efforts and potentially drive up deal prices as a result.”

Other findings of the study include:

• Private equity firms will benefit from stable debt markets. Such stability leads to a smoother ride toward leverage, the report asserts, and thus deals structured as leveraged-buyouts should increase in frequency in the coming year.

• What has been considered a bull market for secondary buyouts – where a private equity firms sells assets to another – will remain popular in the coming year, the report says.

• Bain predicts that more companies will turn from public entities to private ones, due to both “valuation and cash flow characteristics” that suit this style of deal.

• Pressure is increasing to exit some investments and return capital to investors. “Unrealized investments for all PE funds swelled to $1.5 trillion by the end of the second quarter of 2010—$663 billion for buyout funds alone—a figure 50% higher than their holdings of dry powder and approaching 60% of total capital under PE fund management, the highest ratio in years,” according to the release. “Seventy-percent of unrealized buyout investments are concentrated in buyout funds of vintages between 2005 and 2008 and virtually no buyout fund with a vintage after 2004 has yet to return paid-in capital to its LPs.”

• On the fundraising side of the private equity equation, Bain predicts that a “crowded and challenging fund-raising environment” will continue as the number of private equity funds will outpace demand from investors.