Boston, March 1, 2021 – Private equity (PE) activity ground to a sudden halt in the second quarter of 2020 as the reality of Covid-19 became apparent. But the industry quickly regained its footing and demonstrated an extreme resilience. Deal and exit value snapped back vigorously in the third quarter, ending the year 8% higher compared to 2019 levels. By all indications, PE weathered 2020’s perfect storm without taking a hit to returns, as valuations remained very high. In terms of putting large amounts of money to work, the year’s second half ended up being as strong as any two-quarter run in recent memory.

One number that stood out was the volume of deals transacted by PE firms, which was down by 24% (about 1,000 deals) in 2020 from recent levels meaning that total investment value was supported by larger deals. With a high level of dry powder and robust credit markets, 2021 deal markets promise to be incredibly busy as investors seek to make up for lost time. Looking at 2021 data through February, global buyout deal value is 60% higher than the average of the first two months for the past five years.

However, high valuations also mean that there is little room for error. Soaring asset prices in sectors like technology mean that multiples for deals getting done today are at or near record highs. This has several important implications for investors in 2021 and beyond. Funds will have now more than ever before to differentiate and make bold moves.

Special-purpose acquisition companies (SPACs) exploded back onto the financial scene in 2020, raising a stunning $83 billion in fresh capital, mostly in the US, more than six times the previous record set just a year earlier. As their surge looks set to continue into 2021, Bain & Company's research found that SPAC returns seem to be improving in aggregate, but individual performance is still highly variable.

Environmental, social and corporate governance (ESG) investing continues to face skepticism. But leaders in the private equity industry are moving quickly to build sustainability and responsibility into how they invest and operate. Bain & Company believes that ESG is no longer a ‘nice to have’– it is a ‘must have’ capability for private equity firms globally.

These are some of the topics addressed in Bain & Company’s 12th annual Global Private Equity Report, released today. Bain & Company is the world’s leading consulting advisor to private equity investors.

“Private equity held up well in a most unprecedented and tumultuous context,” said Hugh MacArthur, global head of Bain & Company’s Private Equity practice. “The market absorbed the drop seen in the second quarter, and ended up on a high overall as dealmakers quickly adapted to working in a remote world. With the number of deals down in 2020 from recent levels, we expect to see a lot of pent-up demand returning to the market. Add to that soaring levels of dry powder and robust markets and 2021 is shaping up to be incredibly busy.”

The Private Equity Market in 2020: Escape from the Abyss

Having rebounded impressively from a dismal second-quarter performance, the global industry generated $592 billion in buyout deal value in 2020. That was an 8% jump from 2019’s performance and 7% higher than the five-year average of $555 billion. A full $410 billion of that total came in the third and fourth quarters as general partners (GPs) raced to put money to work.

Amid heavy competition and a flood of investment capital―both debt and equity―buyout multiples continued to defy gravity in 2020, averaging 11.4 times earnings before interest taxes, depreciation and amortization (EBITDA) in the US as of year-end and a record 12.6 times in Europe. As a measure of how hot the market was, around 70% of US buyouts priced above 11 times EBITDA.

Multiples rose across industries in 2020 but were especially buoyant in the sectors most immune to Covid-19 (such as payments) or those that benefited from the pandemic (like technology). What amounted to a flight to quality meant private equity targeted companies that could support more debt, and banks were happy to supply it. Despite the deep uncertainty surrounding the Covid-19 economy, debt multiples shot up in 2020, with almost 80% of deals leveraged at more than 6 times EBITDA.

Unspent private capital overall, including that committed to venture, growth and infrastructure funds, has grown in stair-step fashion since 2013 to almost $3 trillion, with around a third of it attributed to buyout funds and SPACs.

Exit activity in 2020 followed the same pattern as investments. Both buyers and sellers hunkered down when the Covid-19 pandemic hit in the spring, and second-quarter activity went into a skid. Exit value picked up in the second half, as revived price multiples and the threat of a tax-law change in the US gave sellers ample incentive to put companies on the market―particularly big ones. The number of exits trailed 2019’s total, but owing to an increase in deal size, global exit value hit $427 billion in 2020, on par with 2019 and in line with the five-year average.

Once again, strategic buyers provided the largest exit channel. Sponsor-to-sponsor deals held up well, and initial public offerings increased by 121% to $81 billion as public equity markets soared.

Global fund-raising of $989 billion was a decline from 2019’s all-time record of $1.09 trillion. But it was still the third-highest total in history, and if one adds in the $83 billion raised for SPACs, it was the second highest. Buyout funds alone raised about $300 billion in 2020, or $340 billion if one includes SPAC capital aimed at buyout-type targets, estimated at $41 billion.

By all indications, private equity weathered 2020’s perfect storm without taking a hit to returns. Looking at 10-year annualized internal rate of return (IRR), funds have so far avoided the kind of damage suffered in the global financial crisis. While GPs exited fewer deals in 2020, those that did produce exits generated multiples on invested capital of about 2.3 times, slightly above the five-year average.

SPACs: Tapping an Evolving Opportunity

Special-purpose acquisition companies, or SPACs, are proving to be a speedier, more certain way to take a company public. However, the economics heavily benefit the sponsor and redeeming initial public offering (IPO) investors while significantly diluting non-redeeming public shareholders.

Having died out after the global financial crisis, SPACs found new life a few years ago and then exploded back onto the financial scene in 2020, raising a stunning $83 billion in fresh capital, more than six times the previous record set just a year earlier. The momentum carried over into 2021, with more than 170 SPACs raising over $50 billion through February alone.

According to Bain & Company, SPACs could play a meaningful long-term role in the capital markets as companies seek alternatives to traditional IPOs. But SPAC structures are likely to evolve so that SPAC sponsors will have more exposure to long-term company performance, both through the initial at-risk capital and forward purchase agreements. That will dial up the pressure to focus on more than just closing a deal and moving on—an attitude that has plagued some SPAC deals in the past.

“In the current environment, any likely target with a public-company profile has SPAC sponsors lining up at the door,” saidBrian Kmet, a partner at Bain & Company. “Winning players looking for long-term, repeatable success will have to balance their effort across three equally important jobs: finding the right deal in time; strengthening due diligence capabilities to analyze and vet their highest-potential targets; and boosting performance through management expertise, talent networks and world-class value-creation planning.

The Expanding Case for ESG in Private Equity

ESG investing continues to face skepticism in the private equity industry, especially in the US.

An analysis of ESG performance among PE firms by EcoVadis, a leading global supplier of business sustainability ratings, shows that portfolio companies owned by US-based firms trail those owned by EU-based firms by 12 points. Yet even in Europe there is ample room to grow. Looking at sustainability factors only, the great majority of EU-owned portfolio companies haven’t launched meaningful initiatives. And the broader corporate world isn’t much further along. EcoVadis data shows that PE-owned companies and corporations are pretty much neck and neck when it comes to ESG maturity scores in both the US and Europe.

Proactive private equity players aren’t waiting for return on investment (ROI) studies to pan out before incorporating sustainability and social responsibility into how they invest and operate. Some have actually segregated these efforts into discrete funds wholly devoted to impact investing, where the goal is to generate social or environmental impact at market-rate returns.

As ESG matures, however, the firms leading the charge—mostly in Europe—have come to consider ESG a core part of what differentiates them as competitors, baking ESG principles into sharpening due diligence, building stronger value-creation plans and preparing the most compelling exit stories.

Editor's Note: To arrange an interview, contact Dan Pinkney at dan.pinkney@bain.com/ +1 646 562-8102 or Aliza Medina at aliza.medina@bain.com/ +44 207 969 6480