SINGAPORE (Feb 24): Private equity investments hit a six-year high with a buyout deal value of US$3.2 trillion ($4.5 trillion) in 2019, according to the Global Private Equity report released by management consulting firm Bain & Company on Monday.

Of the amount, US$2.5 trillion was for private capital, while US$830 billion was for buyouts.

“Private equity investors had another strong year, but they had to work harder than ever for their deals to be successful,” notes Hugh MacArthur, head of Bain & Company’s Private Equity practice.

Deal count for 2019 came in at 3,600 while deal value was on par with historical averages at US$551 billion, despite record high valuations and intense competition that capped the number of mega deals that general partners could close.

This came primarily from public-to-private transactions (P2P), which hit their highest level in 12 years. In fact, eight of the top 10 buyouts involved public companies that were privatised in 2019, the report shows.

There was also significant interest in co-sponsored deals with limited partners, following greater appetite for private equity by institutional investors.

Meanwhile, a favourable exit environment made 2019 an opportune time to be a seller. Exit count stood at 1,078 – the lowest level in seven years, thereby dragging its value to $405 billion. This brought portfolios to healthier, post-recession holding periods.

And while investments and exits plateaued, buyout fundraising peaked, albeit through fewer funds. Investors poured US$894 billion into private capital which funds private equity, real estate, infrastructure and natural resources.

This raised the buyout asset class to US$361 billion, accounting for 40% of total private capital.

“When it comes to fundraising, a ‘winner takes all’ dynamic took hold as more of the capital raised went to fewer firms,” observes MacArthur.

He adds, “buyout firms with solid track records, a clear sector strategy and a distinctive value-creation story, proved to be attractive options for investors”. 

Trend-based investing

Sector-based investment opportunities have become a trend in recent years, with firms taking a particular liking to the technology sector because of its high margins, steady earnings, and new generation of attractive software and services.

However, private equity tends to avoid the most hyped tech segments and invests in enterprise software companies which are deemed more resilient in a downturn, the report shows.

This is, as the sector generates strong revenue growth and boasts solid fundamentals from the need to stay relevant to its digitally-savvy customers.  

Moreover, the sector’s low level of capital impairment costs and growing innovation around mobile and cloud technology, make it a viable investment option.

Aside from tech – social and environmental issues are gaining popularity among investors, amid growing evidence of their ability to improve returns and limit risks.

Says Usman Akhtar, an expert from Bain & Company’s Private Equity practice in Jakarta, “general partners can no longer do without a clear ESG strategy”.

“Impact investing has the potential to be a clear game changer. The question is whether funds can do well by doing good. It is early days, but evidence such as technology and a shift in the consumer mindset is building to support the idea that impact investing will enhance performance, not detract from it,” he adds.

Even so, it is paramount for investors to stay ahead of the curve – especially given the ease with which technology and innovation disrupt industries. As such, the report cautions private equity investors to understand the risks and opportunities arising from disruption, before investing.

And questions to note include where disruption is most likely to come from and how it may alter solutions delivered by the industry’s top companies.