We just sprung forward over the weekend, but Bain & Company is already seeing “green shoots” in the private-equity world.

Experts said on Monday those “green shoots” are emerging for prospects this year and beyond within the global private equity world. That’s despite 2023 having generated the sharpest drop-off in private-equity activity since the global financial crisis of 2008-09.

Those assertions and more came via Bain & Company’s 15th annual Global Private Equity Report released the day after we turned the clock ahead one hour throughout most of the U.S.

Bain explained private equity dealmaking as well as exits succumbed to steep declines last year in the face of rapid increases in interest rates, the sharpest since the 1980s, which sapped investor confidence in a malaise spreading to every region and aggravating 2022 setbacks.

Experts calculated buyout investment value dropped by 37% year-over-year last year alone to $438 billion, the worst total since 2016, and was left 60% lower compared with 2021’s peak.

Against 2021 highs, deal count was down 35% and exits value were down by two-thirds (66%), according to Bain’s tracking.

But Bain’s newest analysis found that, while major challenges to a full-blown revival persist, the private industry is witnessing a steady ticking upwards in activity which — while still tentative in the firm’s opinion — sets the stage for improved fortunes barring new macro shocks, with even limited rate cuts hinted at by the Federal Reserve likely to spur increased dealmaking.

With buyout funds alone sitting on record uncommitted funds of $1.2 trillion in dry powder — 26% of which is four or more years old — Bain projected the anticipated revival will likely be stoked by the heavier than normal incentives for general partners to resume dealmaking.

“The deal market is getting off to a somewhat better start this year and we’re cautiously optimistic over prospects,” said Hugh MacArthur, chairman of the global private equity practice at Bain & Company. “The sheer scale and speed of rate rises last year, and the uncertainty around that, was a shock for the industry in 2023.

“But the outlook remains sound. With rates set to moderate in coming months there’s a greater sense of stability. Coupled with the incentives to put the record mountain of dry powder to work, we expect GPs to come off the sidelines. But passively waiting for conditions to recover is not a viable strategy,” MacArthur continued.

Yet while private equity conditions are starting to brighten again, Bain also cautioned that the industry continues to confront key and “unprecedented” challenges, magnified by the vast increase in its size and complexity since the global financial crisis, as well as persistent macro uncertainties as anxieties over recession risks continue to nag even given robust U.S. growth, with record-low unemployment and strong equity markets.

Private equity and other parts of the investment world will be part of the conversations during Cherokee Media Group’s Auto Intel Summit + National Remarketing Conference that runs April 23-25 in Cary, N.C.

Early bird discounts run through March 26. Agenda and registration details can be found at www.autointelsummit.com.

Exit deep freeze presents private equity’s critical challenge

Turning back to the Bain report, experts singled out exits as the industry’s most pressing issue. Why?

With exit markets having seized up, Bain said that situation restricted return flows of capital to limited partners while leaving general partners sitting on an aging $3.2 trillion of unsold assets, accounted for by some 28,000 companies.

Bain mentioned businesses held for four years or longer comprised 46% of the total, the highest since 2012.

Experts pointed out the plunge in exit activity saw buyout-based exits drop by 44% in the last year alone, to $345 billion by value, while the number of exit transactions fell by 24% to 1,067, with exits slack across all geographies.

“The exit conundrum is now really critical to fix as the market improves — the current threat to investor cash flows and the sector’s liquidity is very real,” Rebecca Burack, head of the global private equity practice at Bain & Company. “Breaking the logjam will need GPs to take charge of their destiny in terms of how they can manage portfolios in order to generate increased distributions for LPs.”

The deep freeze trend for exits detailed by Bain surfaced as corporate M&A activity dried up, with harried corporate executives struggling to plan acquisitions amid macro uncertainty and rising rates driving up financing costs.

Still, Bain tabulated that corporate buyers accounted for nearly 80% of total exit value in 2023, some $271 billion, down 45% from the previous year.

Sponsor-to-sponsor exits — what Bain said are deals between private equity firms — were also hit hard, with these transactions dropping 47% from 2022 to $62 billion. Bain indicated private buyers were deterred by higher rates leading to a need to spend more to borrow less as a multiple of a portfolio company’s earnings (EBITDA).

Bain added the IPO exit channel showed some signs of life, meanwhile, rising to $11.8 billion last year from $6.9 billion in 2022, but IPOs still made up just 3% of total exits volume.

Cash still king in many instances

Bain cautioned about another investment world component, stating the none of these three main exit channels are likely to rebound vigorously in the short term.

Experts projected that’s likely to leave buyout funds struggling to make any meaningful dent in their $3.2 trillion pile of unexited assets while higher rates trigger rising financing costs for portfolio businesses.

Bain cited these figures to back up that assertion.

Last year, $95 billion in leveraged loans requiring refinancing at higher rate and by year-end 2025, loans worth more than three times that amount, some $300 billion, will mature, making life tough for GPs yet to exit those situations.

In the face of these challenges, Bain suggested that private equity funds need to take urgent action on multiple fronts to break the exit logjam.

Experts recommended that general partners should “double down” on value creation, “using every possible means to boost growth and earnings in portfolio companies as higher rates weigh on valuation multiples.”

Bain also suggested this strategy should be done in tandem with “more aggressive” portfolio management to dispose of assets sellable for an attractive return, with restructured balance sheets where necessary, in order to boost distributions of capital to limited partners.

At the same time Bain said general partners need to boost fund-raising amid intensified competition for limited capital pools.

“Getting unstuck demands action in several directions. What’s critical is demonstrating to LP investors that your firm is a responsible steward of capital with a disciplined, unemotional plan to break the gridlock. Cash is clearly king now in private capital — and it needs to be a top priority,” Burack said.

Rate hikes take a heavy toll on confidence

Bain tracked the setbacks suffered by the private sector last year as the Federal Reserve’s successive interest rate increases, totaling 525 basis points from March 2022 to July of last year.

Experts said these moves left a tremendous impact on the industry’s confidence and extended the setbacks in performance suffered since mid-2022.

Within the plunge of more than a third (37%) in buyout values, Bain indicated deals of all kinds were impacted but those dependent on bank financing suffered most as yields on large, syndicated loans approached 11% in the U.S. and 9% in Europe, marking 10-year highs.

AI and private equity

Bain also touched on how artificial intelligence could impact the private equity space, saying the technology has potential to be a “game changer” for the industry in several ways.

Experts first mentioned deal sourcing.

With fund professionals screening multiple possible deals to find one worth pursuing, Bain explained generative AI’s capability to scan massive pools of data for insights can be a major productivity enhancer to make dealmakers smarter and faster, boosting returns.

Bain also suggested AI can also have a transformative impact of multiple areas of private equity funds’ operations across the value-creation cycle.

Experts explained firms can deploy AI for tasks from automated data room scraping to making due diligence more routine and efficient while also securing a more complete picture of a target company’s prospects, to streamlining back-office functions.

But Bain also recommended that private equity firms will also need to assess another dimension of AI by looking at how portfolio companies’ may be affected by the technology and gauging whether these businesses can lead innovation in use of AI or will see their activities disrupted by it.