The global private equity industry, which raised $701 billion in funds last year on the back of increased investor enthusiasm, is struggling to deploy capital amid intense competition for deals in the US, Asian and European markets, according to a new report.
The industry’s inability to put money to work as fast as it’s coming in has pushed the levels of ‘dry powder’ - sums allocated for deals by companies – to an all-time high of $633bn in uncalled capital, the consultancy firm Bain & Company said in its 2017 Global Private Equity report.
More than $286bn of the unused capital was raised through megabuyout funds – investment vehicles larger than $5bn.
There is no shortage of assets in play and more than 38,000 companies were bought and sold around the world last year, at an estimated value of $3.3 trillion, however, private equity’s share of market was just 13 per cent by value and 8 per cent by deal count. To trim back the massive overhang of uncalled capital private equity firms need to deploy large amounts of capital more large-scale, merger and acquisition deals, according to the report.
“This structural imbalance is, without doubt, the industry’s biggest challenge, stemming from heavy competition for deals, which puts persistent upward pressure on asset prices,” said Hugh MacArthur, global head of Bain & Company’s private equity practice.
Both buyout value and exits recorded healthy gains, however, private equity deals in the Middle East were impacted by the regional economic slowdown, Said Garnier, Bain’s Middle East partner noted. “Some assets’ exits have been postponed until better times, deal flow remains solid but the industry mix has shifted from general retail to more resilient sectors such as education and healthcare, as well as niche sectors with specific growth drivers.”
Expectations for valuation multiples are becoming more reflective of the region’s “new normal”, he said adding that consolidation is happening in all sectors – including in PE owned assets.