Special report Private markets
TheEconomistFebruary26th 2022 3Fired up
W
hen john connaughtonleft consulting for private equity
(pe) by joining Bain Capital in 1989, “my mentors counselled
against it,” he recalls. “They said it wouldn’t last.” Now he heads
Bain’s global pebusiness. He has helped assemble such huge deals
as the formation of iqvia, a lifesciences group valued at $47bn.
Bain Capital manages $155bn of assets. The target for its 13th buy
out fund last year was $9bn; it closed just short of $12bn.
pehas been on a tear for three decades. Other firms set their
sights even higher than Bain Capital. Blackstone, the biggest,
wants to raise a record $30bn for its next fund. cvc, Hellman &
Friedman and Apollo Global Management have launched vehicles
of $20bn or more. Funds are not just bigger but also being formed
more quickly. The cycle between general partners (gps), who man
age pefunds, closing one fund and starting the next has shortened
from five years to half that, says David Perdue of pjtPartners, an
investment bank. Institutional investors such as university en
dowments, sovereignwealth funds and pension plans are
increasingly keen on peand other alternatives to public markets.
The attraction is understandable: in the latest fiscal year, many
large American endowments enjoyed returns of 3060% mainly
thanks to private markets.
The peindustry has been “supersizing”, says Hugh MacArthur
of Bain & Company, a consultancy no longer affiliated with Bain
Capital. By most measures, from fundraising to “dry powder”
(committed capital awaiting deployment), it is three times larger
than a decade ago. In just five years, the number of pefunds regis
tered in America has jumped by more than half, to over 18,000.
Dealmaking is at record levels. The global value of disclosed
leveraged buyouts reached $1.2trn in 2021, far above the previous
record of $800bn in 2006. pemade up a fifth of all mergers and ac
quisitions, its highest share for at least a decade. This deal splurge
has supercharged activity in highyield (junk) bond and lever
agedloan markets. Junkbond issuance surpassed $600bn for the
first time last year. So hungry were pefunds in 2021 that the bid
ding process sped up dramatically. Kem Ihenacho of Latham &
Watkins, a law firm, says that, just as buyers gazump when hous
ing markets are redhot, many bidders are “preempting the auc
tion” by offering to sign less than halfway through the process.
Besides buying assets from corporate owners and founders,
private funds buy from each other. Some firms have been through
three or four pefunds’ hands. In America, secondary buyouts can
exceed the volume of initial public offerings (ipos), the usual
route for investors to cash out, says the Bank for International Set
tlements (bis), the central bankers’ bank.
The peboom is part of a broader expansion of private markets.
Toptier firms that once focused on leveraged buyouts, such as
Blackstone, kkrand Carlyle, now look just as keenly for opportu
nities in private debt, real assets such as property and infrastruc
ture, and “growth equity”, which sits between venture capital and
buyouts. More than twothirds of the industry’s dry powder is
earmarked for investments other than buyouts. Since 2010 buy
outs have gone from 80% of kkr’s business to less than half.
These market leaders are now “onestop capital providers” for
firms less able to tap traditional sources such as banks and public
markets, says the bis. Such diversification (along with strato
spheric pay) has cemented their reputation as the new kings ofThe past decade was golden for private financial markets. Now they are being dramatically reshaped, says Matthew Valencia