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Private equity groups globally have a record 28,000 unsold companies worth more than $3 trillion, as a sharp slowdown in deal-making creates a crisis for investors looking to sell assets.
The figures, revealed in consultancy Bain & Co's annual private equity report, show how quickly the industry has grown over the past decade, as well as the challenges it faces from rising interest rates that have increased financing costs.
“It may take another two or three years before the money starts coming back [to investors]Hugh MacArthur, head of private equity at Bain, told the Financial Times. “This is probably the No. 1 interest in the market right now.”
Last year, the combined value of companies sold by the industry privately or on public markets fell 44 percent in 2022 to its lowest level in a decade.
The decline in value was greater when private equity firms sold portfolio companies to competitors, a practice that makes the industry look like a potential “pyramid scheme,” according to one important investor.
The value of companies sold to other buyout groups fell by 47 percent in the past year, with a mismatch in opinion about the value of assets being the main reason behind this.
Bain's report found that more than 40 percent of businesses waiting to sell are at least four years old, suggesting that owners should be preparing to sell. Private equity firms generally hold portfolio companies for three to five years, although it may be longer in some cases.
“Half of that $3.2 trillion should be in the sales window,” MacArthur said. “It will be a multi-year issue.”
It is difficult to satisfy private equity's need for liquidity – to pay investors who want to exit – when assets are difficult to sell.
This has prompted the industry to use alternative methods of raising funds, including “net asset value” financing – loans secured against typically debt-laden portfolio companies – and transferring companies to new internal funds. This can allow new investors in while others exit.
NAV loans in particular are coming under more scrutiny by investors as they become more popular. The Association of Institutional Limited Partners, an industry body representing professional private equity investors, is preparing draft recommendations to get more disclosure about when to use it and its risks.
The problems buyout groups face in selling assets lead to disparities in fortunes when they try to raise new money from investors.
“It has truly been a year full of haves and have-nots,” the Payne report said. Only 20 funds account for more than half of the $448 billion raised by private equity, with investors focusing on companies with records of returning cash to their backers.
The “secondary” market — where private equity investors buy and sell existing stakes in funds and private equity firms move assets from old funds to new ones — has been another bright spot.
The amount of money raised in the secondary market has nearly doubled in the past year, with firms including Blackstone and Lexington Partners raising more than $20 billion each.
There are also some signs that the traditional IPO exit path is starting to make a comeback.
Last week, German cosmetics retailer Douglas, a company backed by private equity group CVC Capital Partners, announced plans to list in Frankfurt seeking a valuation of around six billion euros.
EQT-backed dermatology company Galderma also announced its intention to raise $2.3 billion in an initial public offering on the Swiss Stock Exchange, at a valuation of about $20 billion.
There have also been some examples of peer-to-peer asset trading, including the sale of a stake in software company Cotiviti by Veritas Capital to KKR in a deal that values the business at $11 billion.
