2013 fundraising efforts translate to over US$1 trillion stock of dry powder

By Paul Mackintosh - 10/03/14

The fifth annual edition of the Global Private Equity Report from Bain & Company (related to Bain Capital only for historical reasons dating back to the latter’s formation by Bain & Co alumni in 1984) has delivered a mixed scorecard for the private equity (PE) industry. Yes, some strong fundraising efforts in 2013 have translated into an unprecedented stock of dry powder of over US$1 trillion, $400 billion of that for buyouts alone. Yes, that capital came in to replace funds from 2007 and other vintages that had at last been invested or otherwise exhausted, clearing much of the pre-crisis overhang – according to Bain & Co’s figures, $427 billion of the dry powder came from 2008 or later, with 80% of that from vintages since 2011 and over one third in 2013 vintage funds. Yes, buyout activity continued strong through 2013 and shows every sign of continuing apace into 2014. Yes, prospects for both trade sales (including secondary buyouts) and IPO exits look similarly strong for the year ahead, giving general partners (GPs) the welcome prospects of realisations keeping the revolving door of capital turning and money going out to limited partner (LP) investors as well as coming in.

And yet ...first, all that recently-raised capital is obviously going to drive up valuations and lead to “ferocious competition on the horizon,” as Hugh MacArthur, global head of Bain & Co's private equity practice, styles it. Entry pricing discipline and a cool head amid the frenzy of head-to-head dealmaking are going to be invaluable assets in such an environment, and it’s telling that Bain & Co sees one of the main deal drivers for the year, on both the investment and the exit sides, as secondary buyouts. Second, LPs have shown a marked propensity that Bain & Co identifies to get in on the action, taking up co-investment positions in consortia or doing direct investments themselves. This is going to rack up the competitive tension still further. And last but definitely not least, the big capital raise of 2013 has not come in as replacement capital for depleted funds in emerging markets PE, according to Bain & Co. Instead, it has piled in on top of uninvested capital that in some cases has “accumulated for more than a decade”. And Asia certainly comprises a large share of EM private equity capital as a whole. The region’s notoriously slow and uneven pace of investment and deal execution looks likely to cause problems and depress returns for some time to come, with this amount of capital piling up behind it.