Back to School: PE enters ‘more sedate new normal’

After a five-year fundraising boom, private equity may be settling into a “more sedate new normal,” according to Bain & Co’s 2016 annual private equity report.

“We’re starting to see the fruition of the deals that were done 10 years ago, at the peak,” said Hugh MacArthur, Bain & Co’s global head of private equity. “We’ve largely dealt with those issues, so now the question is: Now what?”

According to the annual report, released on February 22, exits from recession-era deals created a surge in distributions to limited partners over the last five years. As returns flowed back to investors, LPs responded in kind by re-upping and increasing their allocations to private equity, according to the report.

“The past year saw the best environment for fundraising since the pre-crash boom,” according to the report, and private equity firms’ store of dry powder swelled to a record $1.3 trillion in 2015. 

The accumulation of dry powder, combined with rising prices and tightening credit markets, will likely give way to a more competitive era for fundraising and acquisitions. As such, “GPs have tried to weave a cautious path to put capital to work,” the report said.

That caution is warranted. GPs do not want to get caught paying premium prices for new assets with a possible recession looming on the horizon, according to the report. Market volatility prompted firms like Apollo Global Management and Ares Management to pivot away from traditional buyouts to focus their efforts on distressed debt investments.  

MacArthur is encouraging firms to consider investing new funds in non-cyclical and counter-cyclical companies, or assets capable of growth through a recession. In the report, Bain & Co cites Bain Capital, The Carlyle Group and Thomas H Lee Partners management of Dunkin’ Donuts as an example of a PE-backed expansion through a recession. The firms helped the New England coffeehouse staple grow in new markets go public in 2011 with a $2.4 billion valuation.

“Even though Dunkin’ Donuts was a regional play in New England, it did have a footprint outside of New England. People buy coffee, even in recessions,” MacArthur said.  

“We’re in a totally different world right now,” he added. “Figuring out how to find [a deal] and win and transform value in a meaningful way is more important than it’s ever been.”

Action Item: See Bain & Co.’s 2016 report here:

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