The private equity industry continued to raise record amounts of funds in 2019, but are no longer offering market-beating returns, according to a new report by consultancy Bain & Company.
The firm's 11th annual Global Private Equity Report found the amount investors poured into private capital — including private equity, real estate, infrastructure and natural resources, reached $894 billion (Dh3.28 trillion) last year, while private equity buyout funds attracted $361bn — the largest amount on record.
However, the report also found the industry's traditional claim that it outperforms public equities no longer rings true — or at least not for US-based buyout funds.
“Our research highlights a notable development in the US buyout market. For the first time, the returns of public markets and private equity have converged over a 10-year period. This raises questions about how private equity can stand out and remain attractive to investors going forward,” said Hugh McArthur, global head of Bain & Company's private equity practice.
Since 2009, both US buyout funds and public equities have offered returns of about 15 per cent over the past 10 years to investors, the report said, citing a "simple comparison with the S&P500 index".
However, returns from funds in Europe and Asia-Pacific have continued to outperform stock market indexes there, according to the report.
Part of the problem is that as more funds are allocated to the sector as investors chase sources of higher yield, competition for assets has intensified, leading to buyout funds paying higher prices for targets. Funds in the US paid an average of 11.5-times a target company's earnings before interest, tax, depreciation and amortisation (Ebitda) in leveraged buyout deals, while funds in Europe paid 10.9-times Ebitda. More than half of the buyout deals done in the US had an Ebitda purchase price multiple above 11, the report said.
Bigger funds run by the largest managers are attracting more capital — the median size of a buyout fund increased by 79 per cent to $444m, but the number of funds closed during the year fell nearly 14 per cent to 238. Since 2006, the most successful managers' share of assets under management has grown 20 per cent, with Apollo, KKR, Platinum and Warburg Pincus among the most successful.
Many institutional investors have also been making the same demands of private equity managers in terms of incorporating environmental, social and governance goals as they do of other asset managers.
"GPs can no longer do without a clear ESG strategy,” said Mr MacArthur. “Impact investing has the potential to be a clear game changer. The question is whether funds can do well by doing good. It is early days, but evidence such as technology and a shift in the consumer mindset is building to support the idea that impact investing will enhance performance, not detract from it.”
The debate about whether private equity outperforms public markets is not new. A 2016 study authored by five CFA Institute members (L’Her, Stoyanova, Shaw, Scott and Lai) stated that when appropriate adjustments are made to a benchmark equities index for leverage, company size and sectors, it found no outperformance by private equity buy-out funds.