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Private equity fundraising, deal activity facing challenges

Fundraising isn’t the only place showing signs of a slowdown. Private equity managers are positioning themselves and their portfolio companies more defensively, according to the report. Inflation is one factor, but debt financing has also increased in cost with the uptick in interest rates. The growing potential for a recession may mean it makes more sense to hold companies for longer or wait to make new investments if a fund lifecycle allows for it, the report said.

Report data shows that the exit market has changed significantly. Global buyout-backed exit value hit $338 billion in the first six months of the year, a decline of 37% from the same period a year ago, the report said. Global IPO value saw a 73% decline in the first half of 2022, falling to $91 billion. Bain said the data suggests that this will increase holding periods for companies that may not be suitable for sale to another private equity manager, strategic buyer or other investor.

Investors and private equity managers are turning to the secondaries market to manage entry and exit points in an environment where it is harder to list companies. Bain & Co. data shows that the volume of secondary transactions grew to $132 billion in 2021 from $40 billion in 2015. Activity in the secondaries market is likely to remain elevated in this environment, the report suggests.

Despite the slowdown, for investors and fund managers that can ride out the current storm there may be some bargains on the other side. “The IRR (internal rate of return) from investments made during recovery years has consistently outperformed the long-term averages, especially investments in top-quartile deals,” the report said.

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