Back to School: Bain report explains why the market is so competitive

Even with a stronger economy, however, U.S. managers will have to work harder to find compelling deal opportunities that can be developed into top-quartile assets.

“What we see going into 2015 and beyond is more and more capital entering the private equity asset class, (but) there is a finite amount of companies that are available to buy,” said Hugh MacArthur, Bain & Co’s head of global private equity.

Private equity funds own more than 20 percent of all U.S. companies with enterprise values between $100 million and $500 million, up from just 8 percent in 2000, according to the report. That has resulted in heightened competition and higher prices for fewer available assets in private equity’s “sweet spot,” which is the middle market, MacArthur said. 

“The industry is becoming more competitive,” he said. “There is still opportunity and there are still inefficiencies in the market, but (GPs are) going to have to figure out what it takes to access those assets and underwrite them.”

While the current environment is far from what could be characterized as a bubble, MacArthur said firms’ $1.2 trillion supply of dry powder and the prevalence of debt have pushed prices to a level that feels like the top of the market. Although this does not indicate a recession is imminent, GPs and LPs should begin to position their portfolios to withstand the next downturn. 

“The thing that is interesting to me in this year’s report (is) the forces that we were talking about for the last several years – high liquidity, high prices, cheap debt – there’s very little to see how this will change until interest rates go up or there’s another recession,” MacArthur said. “How they adapt this year and next, and how they prepare themselves for the next turn of the cycle, will really define how attractive the asset class is in the future.”