The best view to take in from the summit of a mountain is that of the next, taller mountain that you hope to climb in the future. 2017 provided quite a summit for private equity—awash with record amounts of dry powder and many lucrative deals—but taking stock of the successes and challenges of the past year will offer an ideal roadmap for how the industry can continue to prosper in 2018. Bain & Company evaluates the state of private equity in 2017 and discusses potential opportunities, obstacles, and strategies for the coming year in its 2018 Global Private Equity Report, available here.
A major theme of the report is the tremendous success of fundraising in private equity. The industry enjoyed a widely-reported windfall over $1 trillion in dry powder and posted a new record for fundraising driven largely by buyout funds. The final tally for 2017 indicates that, globally, firms raised $701 billion during the year, and in this timeframe, both the number of funds and their capital targets grew based on previous years’ levels. Furthermore, as Bain points out, of funds that closed in 2017, more than two-thirds met or exceeded fundraising targets and 39% closed in less than a year.
While Bain is careful to note that investors “are watchful for signs that the global market is overheating,” the report also shows that there’s little evidence to suggest interest in private equity is cooling. According to data from Preqin, 92% of investors with private equity allocations plan to devote at least the same level of capital, if not more, in the next year. Much of this investor confidence is rooted in results as private equity continues to outperform other asset classes.
However, the prosperity of 2017 and the optimism it’s carried into the beginning of 2018 don’t suggest private equity firms should become complacent. As competition over a limited pool of quality assets intensifies between firms with enormous reserves of capital, returns may flatten, so private equity’s recent string of historic successes means that the industry needs to develop new strategies and techniques for adding value.
Bain’s report suggests three potential paths for firms to establish new capabilities that will enable them to thrive. First, firms can improve their skills when it comes to assessing leaders and deploying talent into tailor-made roles that create value at all levels of the operation. Firms can also prioritize actively managing companies to achieve profitable organic growth instead of simply cutting costs or acquiring additional high-priced assets. Additionally, technology provides new opportunities for firms to conduct due diligence and analytics at lightning speeds, and they can take advantage of this in order to obtain insights, develop strategies, and take action faster than ever before.