A Look at Bain & Company’s Global Private Equity Report 2023:
How To Take Advantage of Investment Opportunities This Year
One quarter into 2023, and we’re still cursing the ripple effect of inflation that monopolized the conversation in 2022.
February 2023 saw a 6% increase in inflation of consumer prices from one year prior. This persistent inflation was met with attempts to make it stop by the Federal Reserve in raising interest rates by 75 basis points. It was raised not once, but three times last year – a speed not seen since the 1980s.
These increases became fodder for those worried about a recession and deterred banks from providing leveraged loans. The rate rises also posed a problem for happy investors who were taking advantage of the steadily falling interest rates of the previous two decades.
Investments, exits and fundraising all declined in 2022 in the wake of the omnipotent macroeconomic forces. Global buyout value, excluding add-ons, totaled $654 billion, down 35% from 2021. Overall deal count fell 10% to 2,318 transactions. In terms of value, 2022 was still the second-best performance historically, but it’s important to note that’s only due to the incredible momentum of the first half of the year.
This “pause” in deals, exits and fundraising has continued into 2023 and will likely persist until macro factors stabilize. Yet, as we explore in this year’s Global Private Equity Report, opportunity awaits firms that stay aggressive and focus on creating value from the inside out.
Challenges such as natural resource shortages, financial market instability and mounting inflation and recession risks will likely still be seen throughout the first half of 2023, or perhaps even after that.
Inflation hasn’t been this high or persistent in 40 years. Firms can do a lot to mitigate inflation’s impact, but, in many cases, it will come down to the blocking and tackling of taking market share and boosting top-line performance.
In analyzing previous recessions, it’s clear that companies have been able to outperform the competition by investing in R&D and pursuing mergers and acquisitions. Companies that are aggressive in making moves early on rather than retreating in fear are the most successful coming out of a recession.
In 2009, Samsung doubled-down on R&D investment, an area their competitors chose to make cutbacks in. They made a fourfold increase in patents filed in the U.S. and built four types of R&D centers that each had an individual product focus. They also continued to invest in marketing, hiring experienced leaders to help take them to the next level.
This initiative rebranded Samsung as innovative and shook up the market with the release of their first Galaxy smartphone in 2009. At the beginning of that recession, Samsung was ranked No. 21 in brand value among Interbrand’s global list, and now they rank No. 6.
Companies also find success in mergers and acquisitions. A Bain & Company report took data from approximately 24,000 M&A transactions that occurred from 1996 to 2006. They found that acquisitions during 2001 and 2002 produced close to triple the excess returns of deals completed in the years prior to the recession.
Meanwhile PwC’s analysis of acquisitions completed by public companies during the 2001 recession proved the timing of deals to be critical. Deals announced during the first half of the recession produced shareholder returns 10% higher than their respective industries a year on, compared to the average 7% shareholders saw six months after the recession had ended.
Bain & Company’s Sustained Value Creators analysis of 2009 found that of 3,900 companies worldwide, the number of U.S. companies that substantially increased profits was 47% higher during that downturn than during stable periods. And 89% more U.S. companies lost profitability in the last downturn than stable periods.
Private equity returns have come largely from multiple expansion in recent years, rather than from revenue and margin growth. But as higher rates continue to put downward pressure on asset prices, GPs will need to be smart about their approach.
That means returns will increasingly have to come from growth in earnings before interest, taxes, depreciation and amortization (EBITDA).
With private equity rounding out 2022 with a record $3.7 trillion in dry powder, GPs will look to make use of funds as soon as possible. Concerns from buyers, sellers and lenders will be on where GDP is headed and how much further the rate hikes have to go.
According to data from the last downturn, those who came out on top properly assessed their risk scenarios, created mitigation plans and set themselves up to accelerate out of the downturn. Not panicking proved crucial. And understanding that every industry is different.
Some are only affected by a few of the macro factors terrorizing the market.
Investments made through a downturn typically generate superior returns over time. In accounting for your particular relevant macro factors and varying scenarios, leaders can confidently find deals.
If you decide to slow down and be conservative, you risk missing out on opportunities that prove to be valuable once the dust settles.
