Private Equity Focus Shifts From Emerging Markets


Private equity investment activity in the Americas is positioned for a solid year, while markets in Europe and Asia-Pacific tread water; this according to the fourth annual edition of the bellwether report on the state of the industry, released recently by Bain & Company.

Bain finds that North America enters 2013 with favourable winds at its back:

  • Private equity showed clear signs of strength in North America and Brazil, South America’s largest market, in 2012. Buyout deal value in North America was up 23 per cent in 2012, while deal activity in Europe and Asia-Pacific fell.
  • General partners (GPs) are optimistic that deal activity in North America will continue to increase into 2013 —majority of GPs surveyed expect investment activity to be up in North America in this year.
  • Debt markets are once again open for business. Investors are hungry for yield wherever they can find it in today’s climate of sustained near-zero interest rates. With capital pouring into collateralized loan obligations and loan mutual funds, the availability and cost of debt rival what they had been during the boom years.
  • Helped by robust credit markets, conditions have become more favorable for public-to-private deals, which powered the 2006-2007 boom. It only takes a few large deals to move the needle on buyout deal value. Based on a screening of all US publicly-traded companies with a total enterprise value in the range of USD 3 billion to USD 50 billion, Bain finds that approximately six per cent of companies have the potential to be attractive public-to-private targets.
  • GPs are more motivated than ever to sell the growing backlog of investments, many of which were made during the during the boom years. But with the “exit overhang” now at more than USD 2 trillion, the industry will be counting on an improvement in the three major exit channels:
  • Sponsor-to sponsor (“secondary”) deals will broaden and deepen: Bain finds that returns on sponsor-to-sponsor deals are comparable to other deal types but are significantly less risky
  • The rising tide of corporate M&A may create new paths to exit, as strategic acquirers look for new targets
  • Brightest signs of life on the IPO front are in the US, where the strong run-up in the public equity markets has lifted stock prices to the pre-crisis peak, boding well for the mega-buyouts that will likely need to return to the public markets for liquidity
  • Limited partners (LPs) increase PE asset allocations and exposure:
  • The average target allocation to private equity for US public pension funds increased from 7.5 per cent to 8.3 per cent over the course of 2012
  • They recognize that, on average, returns from PE have outpaced other asset classes (i.e. fixed income, real estate, listed equities) over the long term and will continue to do so going forward
  • The pressure for LPs to boost returns and the need for GPs to secure capital is leading the two parties to experiment with a range of new models – including separate accounts, non-traditional fund models, and direct investment programs.

“In a world economy that remains prone to macro shocks, North America continues to be one of the most attractive markets to PE investors,” said Hugh MacArthur, head of Bain’s Global Private Equity Practice and lead author of the report.”

Alexander De Mol, Bain Partner in Dubai, said, “The new findings of Bain & Company’s Global Private Equity Report provide invaluable insights that have benefited key market players worldwide.


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