Private equity groups globally are sitting on a record 28,000 unsold companies worth more than $3tn, as a sharp slowdown in dealmaking creates a crunch for investors looking to sell assets.
The numbers, revealed in consultancy firm Bain & Co’s annual private equity report, show how rapidly the industry has grown over the past decade, as well as the challenges it faces from higher interest rates that have increased financing costs.
“It may be another two to three years before the money starts to come back [to investors],” Hugh MacArthur, chair of Bain’s private equity practice, told the Financial Times. “It’s probably the number one concern in the marketplace right now.”
Last year, the combined value of companies that the industry sold privately or on public markets fell 44 per cent on 2022 to its lowest level in a decade.
The decline in value was even bigger where private equity groups sold portfolio companies to rivals, a practice that makes the industry look like a potential “pyramid scheme”, according to one critical investor.
The value of companies sold to other buyout groups fell 47 per cent last year, with a mismatch in opinion over how much the assets were worth being the main reason why.
More than 40 per cent of the companies waiting to be sold are at least four years old, the Bain report found, suggesting their owners should be getting ready to sell. Private equity groups generally own portfolio companies for three to five years, though in some cases it can be longer.
Half of that $3.2tn should be in the window of being sold,” MacArthur said. “It’s going to be a multiyear issue.”
Private equity’s need for liquidity — to pay out investors that want to exit — is difficult to meet when assets are hard to sell.
This has prompted the industry to use alternative money-raising tactics, including so-called net asset value financing — loans secured against typically highly indebted portfolio companies — and transferring companies to new internal funds. This can allow in new investors while others exit.
NAV loans in particular are under more scrutiny from investors as they have become more common. The Institutional Limited Partners Association, an industry body that represents professional private equity investors, is working on draft recommendations to obtain more disclosure about when they are used and their risks.
Advisory Board @Health System Intelligence, Medical Informatics
8moGreat to see your success!