Earlier this year Bain & Company released the 2022 version of its annual State of Private Equity report. Bain is one of the world’s leading consulting firms and its private equity practice is one of their largest and most well known practice areas. Each year Bain highlights private equity and venture capital trends from the previous year as well as identifies drivers to look out for in the near future. This year in particular they highlighted their views on market challenges (e.g., inflation, supply chain, energy, etc.) and their implications for future investing cycles.
This report is insightful and LONG, weighing in at 84 pages. We’ve distilled four of our takeaways from the report below, although the link to the full report is also in the footnotes.1
2021 was a record year across several metrics
In terms of deal and exit values, 2021 set record highs. Global buyout funds penned over $1 trillion in new deals, while also exiting nearly $1 trillion in total value. With regard to fundraising, 2021 was the second highest year on record, with nearly $400 billion raised. This can position certain funds well to take advantage of upcoming economic turbulence given their potentially significant levels of dry powder/capital ready to invest. So much capital waiting to be deployed highlights the importance of investing in proven funds who have a track record of winning the best deals.
Private equity’s continued outperformance
Bain reports that “private equity continues to offer broader exposure, less volatility, and returns that are better over time, especially at the top tier”. The graphic below (also from Bain) shows that while historically the average PE fund does outperform their benchmark index in both the US and Europe, top quartile funds provide measurable outsize returns.
The attraction of growth
Growth equity, along with venture capital, has been growing significantly. Over the past 10 years, the top 20 private equity firms have increased the annual money raised for growth equity funds from $1b to $12b. Sitting between venture capital and traditional buyout private equity, growth equity is a form of private equity which typically finances companies after they are too large for venture capital but are not yet public or large enough for buyout takeovers. These funds usually focus on companies with strong product market fit and revenue, providing capital and operational expertise to turn them into true enterprises.
Opportunities and challenges in the private markets
It is no doubt that 2022 has been a turbulent year so far for markets. While private equity can be more stable in times of uncertainty than public markets (according to Neuberger Berman),2 it is important that PE & VC funds appropriately account for certain market risks to protect returns. Multiples (i.e., the prices paid for private companies) grew significantly over the past few years. Bain indicated that while "investors shouldn’t expect that strong software assets will see multiple declines... paying full price with conviction requires deep expertise, both internally and through an ecosystem of advisers and experts". Firms with strong diligence processes, operators, and advisors are more likely to succeed here. Additionally, supply chain disruptions and inflation are creating significant operational challenges for companies. Private equity funds that have operational expertise and can assist their portfolio companies with challenges such as supply chain and go-to-market are better positioned to thrive.
Join our waitlist and you'll get early access to our beta platform opening up access to top-tier PE & VC funds!
1 Source: Bain & Company, Global Private Equity Report 2022, 2022.
2 Source: Neuberger Berman, The Historical Impact of Economic Downturns on Private Equity, May 2020.