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September 2023
AAM Magazine
September 2023
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PE Panorama: Bain paints the pain

By Paul Mackintosh   
March 20, 2023

Bain & Company’s recent global private equity report gives a pretty authoritative picture of the performance of the asset class over a tumultuous 2022. There are plenty of indicators of recent outcomes and future expectations, and some valuable insights into the asset class’s favourite claims and supposed advantages.

As outlined in the report, 2022 was a game of two halves. The first half of the year was very much in line with performance of previous years, with a high deal count, plentiful fundraising, and remunerative exits. But all this ended with the US Federal Reserve’s interest rate hikes to rein in inflation, and activity in all three areas plunged.

Year-end totals derived by Bain & Company from Preqin and Dealogic figures are well down from 2021 at US$654 billion versus just over $1 trillion for investments, $565 billion versus $969 billion for exits, and $347 billion versus $413 billion for fundraising.

One obvious conclusion is that private equity is not counter-cyclical. The rate hikes pulled its strings as hard as any other asset class, and with signs that the effects will be longer-lasting. The report emphasises that the “pause” has continued into 2023, with no end in sight. Conceivably, the oft-cited “smoothing effect” of private equity on returns may help delay full recognition of the impact, but there seems little doubt that the performance of the asset class will be impacted. Institutional investors who have been ploughing money into private equity funds as a buffer against cyclical trends are likely to be disappointed.

Private equity’s dependency on cheap money was underlined by the Fed’s rate hikes. If the asset class is so susceptible to supply of cheap leverage, you have to ask how much of the oft-touted claims of private equity firms to build the value of their investee businesses is justified.

Meanwhile, David Erickson, senior fellow and finance lecturer at the Wharton School of the University of Pennsylvania, has just released an analysis, giving his take on what’s wrong with the private equity market and how to fix it.

The first fix he recommends is to “go back to the basics” - in other words, investments where private equity funds “grew the business by improving operations and helping the company scale”. Unfortunately, given how the hand-over-fist growth of the industry in recent years has happened in parallel with the cheap money era that now seems to have come to a grinding halt, you have to wonder how many firms are still capable of that.

In the circumstances, Erickson’s second recommendation seems advisable - “give back the money”.