This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Bain & Co.: Buyout Shops Thinking Small

NEW YORK (The Deal) -- After a disappointing 2013, the number of new investments in private equity is expected to rise in 2014, according to the latest global industry survey by consultancy Bain & Co. But with vast stores of dry powder to deploy and relatively few large assets for sale, buyout firms will likely try to put their money into smaller targets. As a result, barring an unlikely upsurge in big public-to-private transactions, such as Silver Lake's buyout of Dell, or 3G Capital and Berkshire Hathaway's (BRK.A - Get Report) acquisition of H.J. Heinz Co., overall deal value will "probably not increase significantly."

Those are key conclusions from Bain's Global Private Equity Report 2014, which also noted that limited partners have been able to refresh their commitments to the best funds over the past year as money flowed back into their coffers. LPs enjoyed returns from realizations, initial public offerings and secondary share sales, as well as a record yield from dividend recapitalizations. While this has breathed new life into the fundraising campaigns of the top-quartile firms, limited partners have become much more selective and may not "re-up" with funds that only provided average or market-matching returns.

In addition, Bain partner Graham Elton noted that the gradual decline in the amount of dry powder left from pre-crisis funds raised in 2006 or 2007 has gone into reverse as new funds raised recently also need to be deployed.

The total dry powder across all asset classes as of the end of 2013 had grown to a record $1.077 trillion, compared to a previous year-end high of $1.056 trillion in 2008, well over a third of which was in buyout funds. Across all asset classes, 902 funds attracted $462 billion in new capital worldwide last year, an increase of 21% over 2012, with the amount of new money committed to buyout funds rising by 89%, to $191 billion and taking the deployable cash in buyout funds to about $400 billion.

Must Read: Texas Industries Deal Nears Early Close

That figure understated the total available for buyouts as it did not include the growing sums set aside by LPs to co-invest with private equity firms in buyout deals or even to invest directly in buyouts, in competition with their general partners.

Yet, as Elton noted, "Better economic conditions make dealmaking harder."

The huge reserves of dry powder and generous supplies of cheap debt, together with resurgent equity markets to act as a benchmark, worked to stretch valuations "in some cases beyond what private equity acquirers were willing to pay." The rise in share prices also limited the supply of deals, as the allure of the public equity markets drew potential targets away.

"Of the 230 companies that made [IPOs] in the U.S. in 2013," the report said, "more than 80% were businesses that might have been attractive as private equity targets." It gave as an example Blackstone Group's (BX - Get Report) disposal of Sea World Parks and Entertainment, which was run as a dual track process with talks with both a possible private equity buyer and a prospective strategic acquirer, before an IPO which valued the business at about $4 billion.

However, with the IPO pipeline still brimming, the likelihood is that private equity will dig deeper into the small and medium-sized enterprise market to source deals in future. Meanwhile, on the exit front, private equity firms have the full range of options to choose from. As well as IPOs, firms can hope to sell to strategic investors, who have record amounts of cash to spend. Many companies also have high-value shares to use as a currency and shareholders who want them to invest in growth. Meanwhile, other private equity houses with money to invest are ready to put it to work in secondary buyouts if they cannot source primary investments. While U.S. buyout activity last year was dominated by private company sales and two big public-to-private deals, European deals were predominantly sponsor-to-sponsor or carve-out transactions.

Whether the same split between Europe and the U.S. repeats itself in 2014 remains to be seen, but secondary buyouts remain an attractive alternative to primary deals for many funds with holdings to exit or funds to invest.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BX $27.44 0.00%
BRK.A $219,000.00 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs