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GLOBAL PRIVATE EQUITY REPORT 2019About Bain liquidity solutions for general partners; and the Chinese PE market, which is on the leading edge in areas like technology. We close our 2019 review of important trends in private equity by getting out our crystal ball. Its a bit cloudy (as is everyones), but we see fundamental shifts happening in capital markets that are likely to drive a long-term trend toward much larger private capital (and private equity) opportunities vs. traditional public equity models. This ongoing movement will have seismic impacts for providers of capital, investors of that capital and for the companies owned by a widening variety of private models. It portends a future in which a much larger share of capital flows into private markets. Perhaps this is indeed the beginning of “the rest of the story” for the PE industry.Hugh MacArthur Head of Global Private EquityGlobal Private Equity Report 2019 2Global Private Equity Report 2019 3 1. The private equity market in 2018: What happened? As the current economic expansion chugged into its ninth full year in 2018, the global private equity (PE) industry continued to make deals, find exits and raise capital at a historic five-year pace. Limited partners (LPs) remain highly enthusiastic and have continued to flood the market with fresh capital. Keeping the momentum going, however, has hardly been easy. Chronically heavy competition has driven deal multiples to historic highs, and growing jitters about an eventual economic downturn are affecting decision making, from diligence to exit planning. For general partners (GPs), putting record amounts of capital to work means getting comfortable with a certain level of discomfort when investing. They are paying prices they swore they would never pay and looking to capture value that may prove elusive post-close. The most effective GPs are stepping up their game to identify targets and sharpen diligence, while simultaneously planning for the worst. In Sections 2 and 3, well explore several strategies firms are using to make the most of an increasingly difficult market. In the meantime, heres what happened in 2018. . Investments: More strength, same challenges Amid heavy pressure to do deals, the PE industry saw another impressive surge in investment value in 2018. Fierce competition and rising asset prices continued to constrain deal countpushing down the number of individual transactions by 13%, to 2,936 worldwidebut total buyout value jumped 10% to $582 billion (including add-on deals), capping the strongest five-year run in the industrys history (see Figure 1.1). While the current investment cycle hasnt been a steady upward march, especially in terms of deal count, it has shown great resilience and overall strength. Every year since 2014 has produced higher deal value than any year in the previous cycle, with the exception of the peak in 2006 and 2007. Over this period, the industry has benefited from an unprecedented wave of investor interest, buttressed by ebullient equity markets, low interest rates and steady GDP growth in the US and Europe. For GPs, it has been a remarkable run. Predictably, experts are debating how long the good times can last. Only one other US recovery on record (from 1991 to 2001) has extended as long as this one. While GDP growth in the West remains strong, US interest rates are rising as inflation picks up in the US and Europe. Slowing growth in China, global trade tensions, ongoing uncertainty about Brexit and year-end market volatility are all fueling concern that this cycle may be running its course. For PE firms, however, the question isnt so much when the next downturn will appear as how to nego- tiate it successfully when it does. With record amounts of capital to invest, it doesnt pay to sit idle trying to time the downturn. Instead, GPs are finding ways to cope with a growing level of macro uncertainty Global Private Equity Report 2019 4 and planning carefully for how they can profit from the downturn. With the global financial crisis fresh in their memories, firms are focusing their diligence much more intently on downside scenarios this time around. They learned valuable lessons during the crisis about what holds up well through the cycleor notand are adjusting accordingly. Even within a sector like healthcare, widely viewed as recession-resistant, there were subsector differences in performance worth noting. Healthcare support services, for instance, produced multiples of better than two times invested capital, while healthcare equipment and pharmaceuticals fared less well, according to CEPRES, a digital investment platform and transactional network for the private capital markets (see Figure 1.2). Spotting pockets of opportunity has been a challenge even in the up-cycle. For GPs, finding the right asset at the right price was the biggest constraint on doing deals in 2018. That helps explain why the number of transactions has remained stubbornly flat, bouncing around between 3,000 and 4,000 buyouts per year since 2010. Indeed, despite the industrys impressive showing over the last five years, it has failed to carve out a larger share of the global market for mergers and acquisitions, which has hovered around 40,000 transactions per year for a decade (see Figure 1.3). When asked what most gets in the way of closing more deals, GPs cite the same challenges they have faced for years: high deal multiples, a dearth of attractive targets and stiff competition (see Figure 1.4). GPs are clearly hungry to do more deals, but when they find attractive assets, they consistently en- counter aggressive corporate buyers willing to push up auction prices. These buyers are strategic, 0 200 400 600 800 $1,000B 0 1,000 2,000 3,000 4,000 5,000 Global buyout deal value (including add-on deals) 1996 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 92 92 93 33 63 63 74 14 04 04 5 17 48 48 49 42 25 25 27 33 29 27 28 Add-on count percentage 14 17 10 11 13 21 12 25 21 14 31 16 43 21 24 23 16 15 20 16 81 11 2 Add-on value percentage Deal count 22% 9% 4% 53% 13% CAGR (1718) North America Europe Asia-Pacific Rest of world Total count Notes: Excludes loan-to-own transactions and acquisitions of bankrupt assets; based on announcement date; includes announced deals that are completed or pending, with data subject to change; geography based on targets location Source: Dealogic Figure 1.1:.Rising.deal.value.in.2018.capped.the.strongest.five-year.stretch.in.history,.while.deal. count.reflected.stiffpetition.and.rising.asset.pricesGlobal Private Equity Report 2019 5 0 20 40 60 80 100% Business support services General industrials Chemicals Construction Natural resources/energy equipment and services Transportation services Food and beverages Media Retail Specialized consumer services Textiles Travel and leisure Miscellaneous Internet Semi- conductors Software Other tech Healthcare facilitiesHealthcare equipmentHealthcare support servicesPharma and biotech Services Banks Insur- ance Misc. Telecom infrastructure Natural resources/ energy infrastructureTelecom equipment and servicesMiscellaneous Global buyout equity capital invested, by sector and subsector (200608) Industrials Less than 1.0x Gross pooled MOIC Miscellaneous ConsumerT echnology Misc. Health- care Misc. Financial servicesOther 1.0x1.5x 1.5x2.0x 2.0x2.5x Greater than 2.5x Unavailable Notes: Includes realized and unrealized buyout deals with invested equity capital of $50 million or more and initial investment between January 1, 2006, and December 31, 2008; MOIC stands for multiple of invested capital Source: CEPRES PE.Analyzer Figure 1.2:.Returns.during.the.global.financial.crisis.were.all.over.the.mapbetween.sectors.and. within.sectors 0 10 20 30% Global buyout share of total M corporate M based on announcement date; includes announced deals that are completed or pending, with data subject to change Source: Dealogic 200405 06 07 08 09 10 11 12 13 14 15 16 17 18 0 5 10 15% Global buyout share of total M&A Deal value Deal count 200405 06 07 08 09 10 11 12 13 14 15 16 17 18 Figure 1.3:.Private.equity.is.not.increasing.its.share.of.the.total.market.for.mergers.and.acquisitions.Global Private Equity Report 2019 6 meaning they will pay more to advance corporate objectives and capture synergies. Increasingly, they are showing up at all ends of the market as they search for ways to spur new growth through acquisition. Large deals, especially a spate of very large carve-out transactions, helped boost deal value in North America by 22% in 2018. The years largest buyout was the $17 billion carve-out of Thomson Reuters Financial & Risk unit, led by Blackstone and the Canada Pension Plan Investment Board. Large public- to-private (P2P) deals, such as KKRs $9.6 billion leveraged buyout (LBO) of Envision Healthcare, also contributed to the bump in value. The strong P2P activity in the US pushed the value of these deals globally to its highest level since the previous take-private boom in 200607 (see Figure 1.5). The reason: Despite the run-up in equity prices, public investors often undervalue companies they dont understand. “If you have a complicated story, youre not really welcomed so much in the public market,” said Josh Harris, the cofounder of Apollo Global Management, which took LifePoint Health private in 2018. “That is creating a very fertile hunting ground for private equity, and we do see more opportunities here.” Sponsor-to-sponsor deals also provided a rich vein of opportunity in 2018. That was especially true in Europe, where deals between PE funds dominated in terms of both value and deal count, as they have since 2010. Partners Group led a consortium including CDPQ and the Ontario Teachers Pension Plan in the $5.4 billion acquisition of Techem, a global leader in heat and water submetering services, from Macquarie. EQT acquired Azelis from Apax Partners for $2.3 billion. It was the fourth consecutive sponsor-to-sponsor transaction for Azelis, a global distributor of specialty chemicals and food ingredients. 012345 Mean of responses by category (1 as most important and 7 as least) 4.8 4.1 4.0 3.1 2.9 Access to financing Regulatory environment Political uncertainty Competition Deal sourcing/ lack of quality assets High transaction multiples Less important More important 2.3 What do you anticipate to be the biggest challenges for PE dealmakers in 2018? Source: Crystal Ball Report 2018, PitchBook Data, Inc. Figure 1.4:.High.multiples,.a.dearth.of.targets.and.stiffpetition.continue.to.be.the.biggest. challenges.for.PE.firms.looking.to.close.deals
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