Global Private Equity Report 2012 | Bain & Company, Inc.
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PE hits a new inflection point
Three years after the global economic downturn, the contours of a new future for PE are finally coming into sharp focus. Through the bumpy recovery of the developed markets and the prospective growth of untested emerging markets, many GPs and LPs seem to have been treading water, waiting for familiar forces to reassert themselves and allowing the industry to find traction for the next long-awaited upswing. When stronger GDP growth eventually resumes, debt markets thaw, equity market volatility subsides and exit channels unclog, surely GPs would be able to get back to putting their masses of dry powder to work in profitable high-volume deal making. It has not happened, and as we have seen in the pages of this report, the PE industry has begun to recognize the need to adapt to the new normal. Having guided their portfolio companies through the cyclical upheaval, GPs worth their carry now know how to cut costs. The skills of managing a balance sheet and keeping costs under control are now basic industry table stakes. In the present highly competitive deal environment, opportunities for cost reduction and capital management are built into every GP’s bid model. They are part of the price any deal-hungry GP must pay to have any chance of acquiring an asset, and they no longer figure in the deal’s excess return. For the foreseeable future, GPs’ ability to partner effectively with management and create growth will be the primary factor that will differentiate top performers from the rest. With no market beta in sight, generating returns both in their current portfolio companies and in new investments hinges on GPs helping managers grow their businesses’ top line. Succeeding in these times requires new skills across every dimension of how PE firms source deals, vet their growth potential, partner with portfolio management teams to achieve supercharged results and, perhaps most challenging of all, reorganize themselves to develop a repeatable model for success. Let’s explore what it takes to win. Identify growth opportunities others don’t see. In the new world of premium-priced assets, GPs need to dig deep to win auctions or seal proprietary deals—without overpaying. Walking the fine line between paying the premium that markets require and ensuring that there is still room to earn a solid return begins with true sector expertise. Having a deeply informed view into the specific industry in which they are investing is crucial to ensuring there is headroom for growth that can yield an attractive potential return despite a steep initial acquisition price. Too many folks have erred in the past by paying up for assets that were solid companies and leaders in their markets but lacked substantial incremental growth potential. Leading PE firms parlay their sector expertise to enrich the mix of prospective candidates for their deal pipelines, probing deeply into specific subsectors in their deal “sweet spots” where growth opportunities are likely to be more abundant. To help expand and refine the target list, they engage a network of advisers that includes senior industry executives and operating partners to bring in more potential deals and conduct an early triage to determine which growth prospects have merit and are worth pursuing further. Knowing that their most precious resource is the time and energy of their people, leading PE firms actively manage each step of the deal pipeline—from origination through due diligence—to ensure that they invest only in the highest-potential opportunities at each step of the process.
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