Evening Brief – 07.17.23

Limited partners face a “liquidity crunch” as time runs out on a record $3.7 trillion in shelved capital and buyout funds waiting on $2.8 trillion in un-exited assets, according to Bain & Company’s Private Equity Midyear Report 2023.

According to the report, fears about “too much dry powder” are unfounded, as volume remains stable across all private asset class strategies, with roughly 75% described as “fresh,” meaning less than three years into the investment term. While there are obstacles to closing deals, particularly large ones, private credit is stepping up amid tighter lending standards from commercial banks.

“Past cycles have shown that for dealmaking to rebound and continue, buyers and sellers need a reasonably stable economic environment – not necessarily an attractive one. And while investors need confidence in the five-year outlook for an industry and a company, a clearer picture is finally emerging,” said Hugh MacArthur, chairman of the global Private Equity practice at Bain & Company.

The report noted that the $2.8 trillion in buyout funds is more than 4x the amount held during the global financial crisis. While investments were down, exits were down even more steeply in the first half of the year, with annualized global buyout-backed exits anticipated to fall by 54% compared with 2022, and exit count set to fall by 30%.

“The decision to sell or hold an asset could come down to a pair of questions: Do you believe that exit conditions will be meaningfully different over the next several months? And does generating the return you were counting on require a value creation plan reset to account for all that’s changed on the macro front?”, said Brenda Rainey, executive vice president of Bain & Company’s Private Equity.

Global deal value for buyout funds reached $202 billion in the first half of 2023, a 58% decrease from the first half of 2022. The 863 deals signed in the year’s first half indicate a 29% yearly reduction from 2022, with add-ons continuing to account for a sizable portion of the global buyout market.

In addition, GPs are under pressure to exit transactions. Buyout-backed exits fell to $131 billion, a 65% decline from the a year ago. On an annualized basis, exit value and exit count is tracking for a 54% and 30% decline, respectively, compared with 2022.

With roughly 26,000 portfolio firms holding onto buyout funds for more than six years, GPs need a “schedule and a strategy” to capture the unrealized potential those companies represent, according to the report. Most assets are approaching or have passed the traditional five-year timeline for a private equity exit.

This year has also been challenging in terms of fundraising. Global private capital raised in the first six months was $517 billion, a 35% decrease from last year.