Exits from buyouts exceeded $450 billion, surpassing the all-time high by a wide margin. The flow of so much capital came as a welcome relief to LPs and GPs alike and has infused the industry with new confidence that returns from holdings acquired during the peak investment years will end up better than most industry pundits feared. However, this flood of capital will have knock-on effects that raise new challenges for investors in 2015 and beyond. The dramatic increase in exits marks the fourth consecutive year distributions have outpaced capital calls for the LP community.
As a result, LPs looking to maintain or increase their exposure to their highest returning asset class made 2014 another strong year for fund-raising. Top funds attracted fresh capital very rapidly, as huge amounts of money chased the same top-quartile performers. Most were oversubscribed and hit hard caps. So, where is the extra capital going? Some of the overflow is cascading into other funds, and some is even going into LPs’ own direct investment programs.
By the end of last year, freshly committed dry powder hit a global record of $1.2 trillion, including $452 billion earmarked for buyouts alone. One thing that did not change very much in 2014 was the always limited supply of companies to buy; it has remained relatively constant as the mountain of capital pursuing these companies has grown. Supported by a continued abundance of low-cost debt and high valuations for comparable public companies in most markets, more PE money chasing the same assets has led to stubbornly high pricing. The forces that are driving up valuations are structural and very difficult to change. The challenge of how to make money investing in PE has never been greater.
As 2015 unfolds, will the PE industry continue to display the resilience that has served it so well in a time characterized by capital superabundance and torpid global growth? The industry’s near-term prospects will be influenced by whether ongoing structural problems in the eurozone and slowing GDP growth in the Asia- Pacific region outweigh the gathering momentum of North America’s cyclical expansion, tipping the global economy into recession. PE’s potential will also be shaped by whether the actions of central banks—in particular, a long-anticipated interest rate hike by the US Federal Reserve Board—choke off the ready availability of cheap high-yield debt or curb the animal spirits of the public equity markets.
Exits: A year for the record books
Optimism was high on the exit front going into 2014. Public equity markets in Europe and North America had registered strong gains in the preceding year, laying a solid foundation for lucrative initial public offerings. Cash-rich corporate acquirers, feeling pressure to meet shareholder demands for growth, were poised to open their wallets for PE-owned companies that fit their strategic goals. And deal-hungry PE funds, eager to put capital to work, were ready buyers-in-waiting of assets groomed by PE owners inclined to sell in sponsor- to-sponsor transactions.
In the end, exits in 2014 shattered even the lofty expectations of an industry primed for a good year. Worldwide, the numbers and value of buyout-backed exits reached new records. At better than 1,250 sales, last year’s exit count surpassed its previous peak of 1,219 transactions in 2007. And total exit value, at $456 billion, also blew past its previous record of $354 billion in 2007 and was 67% higher than it was in 2013.
A superabundance of global capital and sustained high asset valuations powered these dramatic gains in most regions of the world, making sellers rejoice and buyers cautious. There were healthy double-digit increases in the number of buyout exits from the year before: 22% in North America and 16% in Europe. In the Asia-Pacific region, which is typically not a buyout market, the number of buyout-backed exits dropped 12%, but overall, PE exits, including sales of minority stakes in private companies and shares of publicly traded enterprises, jumped 22%, to 476 sales—well above the previous year.
Exit channels were deep and broad
Exits through all channels increased significantly last year, with sales to strategic buyers and IPOs dominating (see Figure 1.4).
Sales to strategic buyers have traditionally been the biggest channel for buyout-backed exits, and corporations saw their purchasing power turbocharged in 2014. With capital spending restrained in a hesitant global expansion, corporations sat on unprecedented cash reserves, and the steep climb in public equity markets made their shares a valuable supplemental currency they could use for acquisitions. Historically low interest rates and wide-open debt markets added further rocket fuel to boost corporations’ ability to buy.