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1、GLOBAL PRIVATE EQUITY REPORT 2023Copyright 2023 Bain&Company,Inc.All rights reserved.About Bain&Companys Private Equity businessBain&Company is the leading consulting partner to the private equity(PE)industry and its stakeholders.PE consulting at Bain has grown eightfold over the past 15 years and n
2、ow represents about one-third of the firms global business.We maintain a global network of more than 2,000 experienced professionals serving PE clients.Our practice is more than triple the size of the next-largest consulting company serving PE firms.Bains work with PE firms spans fund types,includin
3、g buyout,infrastructure,real estate,and debt.We also work with hedge funds,as well as many of the most prominent institutional investors,including sovereign wealth funds,pension funds,endowments,and family investment offices.We support our clients across a broad range of objectives:Deal generation.W
4、e work alongside investors to develop the right investment thesis and enhance deal flow by profiling industries,screening targets,and devising a plan to approach targets.Due diligence.We help support better deal decisions by performing integrated due diligence,assessing revenue growth and cost-reduc
5、tion opportunities to determine a targets full potential,and providing a post-acquisition agenda.Immediate post-acquisition.After an acquisition,we support the pursuit of rapid returns by developing strategic blueprints for acquired companies,leading workshops that align management with strategic pr
6、iorities,and directing focused initiatives.Ongoing value addition.During the ownership phase,we help increase the value of portfolio companies by supporting revenue enhancement and cost-reduction initiatives and refreshing their value-creation plans.Exit.We help ensure that investors maximize return
7、s by preparing for exit,identifying the optimal exit strategy,preparing the selling documents,and prequalifying buyers.Firm strategy and operations.We help PE firms develop distinctive ways to achieve continued excellence by devising differentiated strategies,maximizing investment capabilities,devel
8、oping sector specialization and intelligence,enhancing fund-raising,improving organizational design and decision making,and enlisting top talent.Institutional investor strategy.We help institutional investors develop best-in-class investment programs across asset classes,including private equity,inf
9、rastructure,and real estate.Topics we address cover asset class allocation,portfolio construction and manager selection,governance and risk management,and organizational design and decision making.We also help institutional investors expand their participation in private equity,including through coi
10、nvestment and direct investing opportunities.Bain&Company,Inc.131 Dartmouth Street Boston,Massachusetts 02116 USA Tel:+1 617 572 2000 1Global Private Equity Report 2023 ContentsPerfect Storm or Tempest in a Teapot?.2Private Equity Outlook in 2023:Anatomy of a Slowdown .3Investments .9Exits .17Fund-r
11、aising .20Returns .24A Private Equity Lens on the Energy Transition .30Web3 Remains Highly Relevant for Private Equity .39Why Private Equity Is Targeting Individual Investors .55Solving for Private Equitys Inflation Conundrum .672Global Private Equity Report 2023 Perfect Storm or Tempest in a Teapot
12、?Dear Colleague:Its easy to think of Dickens and A Tale of Two Cities when looking back on 2022(although I think we are in a cycle that exceeds the boundary of a calendar year).The first six months resembled 2021s record-breaking activity:incredible numbers of deals,lots of exits,and substantial fun
13、ds committed to the chase for the next five years.Then something happened in Junein short,the Federal Reserve happened.The move to raise interest rates by 75 basis points,and then keep raising them,was a shot heard round the world,signifying the end of cheap debt in buyout markets and sparking stron
14、g concerns about persistent inflation.The rate increases fueled speculation about recession,which,in turn,spooked banks from providing leveraged loans.The dominoes fell from there,toppling year-end totals for deals,exits,and fund-raising.The“pause”has continued into 2023,and its persistence will be
15、determined by how quickly macro factors stabilize.The trends changing the PE landscape that we look into deeply this year include the real and imagined impact of web3 on investment markets,the drive for individual or retail capital by GPs,and what the great energy transition really means for investo
16、rs.Lastly,we peer into our crystal ball to gauge the impact of persistent inflation on PE portfolios and come up with a rather counterintuitive but simple solution to preserve returns for LPs.We hope you enjoy our Global Private Equity Report 2023,and we look forward to seeing many of you in person
17、this year.Hugh MacArthur Chairman,Global Private Equity3 3Private Equity Outlook in 2023:Anatomy of a SlowdownAs extraordinary and resilient as the post-Covid rally in global private equity proved to be,it was ultimately no match for the Fed.For the first six months of 2022,the industry extended 202
18、1s record-shattering burst of deal activity,despite persistent inflation,the invasion of Ukraine,and growing tensions with China.Then,in June,when US central bankers issued the first in a series of three-quarter-point interest rate hikesand their colleagues around the world followed suitbanks pulled
19、 back from funding leveraged transactions and dealmaking fell off a cliff,pulling exit and fund-raising totals down with it(see Figure 1).Given the heights from which they fell,buyout deal value($654 billion),exits($565 billion),and fund-raising($347 billion)all finished 2022 with respectable totals
20、 in a historical context(see Figure 2).But the sudden reversal marked the end of an up cycle that has endured(with a brief Covid brake tap)since 2010,when the industry emerged from the global financial crisis and produced a 12-year run of stunning performance.It remains to be seen whether the abrupt
21、 shift from accommodation to tightening will trigger what could be called the most anticipated recession in history that hasnt happened yetat least not in the US.A tight labor market and lingering Covid-related stimulus have so far kept the economy limping along.(The fleeting two-quarter dip in 2022
22、 wasnt officially deemed a recession.)Yet theres no denying the impact of the unprecedented mix of macro forces in play(see Figure 3).The resulting rise in rates has already shut off the spigot of cheap,obtainable debt financing.And Inflation and rising rates put an end to the extraordinary post-Cov
23、id surge in dealmaking,setting up a challenging year ahead.By Hugh MacArthur,Rebecca Burack,Graham Rose,Christophe De Vusser,Kiki Yang,and Sebastien Lamy4Global Private Equity Report 2023 Figure 1:Investments,exits,and fund-raising all declined in 2022 as macro forces took their tollFigure 2:Dealmak
24、ing and exits slowed through the second half of the year,while fund-raising remained below 2021s peakNotes:Investmentsexcludes add-ons;excludes loan-to-own transactions and acquisitions of bankrupt assets;based on announcement date;includesannounced deals that are completed or pending,with data subj
25、ect to change;Exitsincludes full and partial exits,bankruptcies excluded;IPO value representsoffer amount and not market value of company;Fund-raisingdata grouped by the year in which funds held their final close;count is of all funds,including thosefor which final close data is unavailable;buyout c
26、ategory includes buyout,balanced,coinvestment,and coinvestment multimanager funds;excludes SoftBankVision FundSources:Dealogic;Preqin;Bain analysisInvestmentsExitsFund-raisingGlobal buyout deal valueGlobal buyout-backed exit valueGlobal buyout capital raised 02505007501,000$1,250B205001,0
27、001,5002,000Exit count0200400$600B2020040060080002505007501,000$1,250B01,0002,0003,000201720222012Deal countCount of funds closedNotes:Investmentsexcludes add-ons;excludes loan-to-own transactions and acquisitions of bankrupt assets;based on announcement date;includesannounced deals that
28、are completed or pending,with data subject to change;Exitsincludes full and partial exits,bankruptcies excluded;IPO value representsoffer amount and not market value of company;Fund-raisingdata grouped by the year in which funds held their final close;count is of all funds,including thosefor which f
29、inal close data is unavailable;buyout category includes buyout,balanced,coinvestment,and coinvestment multimanager funds;excludes SoftBankVision FundSources:Dealogic;Preqin;Bain analysisInvestmentsExitsFund-raisingGlobal buyout deal value,quarterlyGlobal buyout exit value,quarterlyGlobal buyout capi
30、tal raised,quarterly 0500$300B00Exit count0500$300B0200400600Deal count050100150$200B0100200300Count of funds closed202221202220205Global Private Equity Report 2023 deep ambiguity about the future course of global economic activity is likely to
31、cast a shadow over the private equity value chain through 2023s first half,if not beyond.What makes the current economic slowdown different from the one brought on by the global financial crisis is the lack of clarity about whats happening.Theres no Lehman collapse,no housing meltdown,no sharp fallo
32、ff in economic activity to signal a definitive sea change.Instead,the global economy is presenting investors with conditions few among them have ever seen before.As if war in Europe,energy shocks,and supply chain issues werent enough,inflation hasnt been this high or persistent in 40 years(see Figur
33、e 4).The resulting rise in interest rates has reversed a downward trend that has defined investment markets for as long as anyone can remember.The net result is the dreaded“U word”uncertainty,a deal killer if there ever was one.As buyers,sellers,and lenders all wait for clarity around the economic f
34、orces that could affect cash flows,uncertainty will continue to act as a cap on deal activity,especially for the largest transactions that require the most leverage.Dealmakers are still finding ways to finance smaller transactions with private credit and larger equity infusions.But the overall decli
35、ne in new deals and exits will likely persist,creating a knock-on effect for fund-raising.Limited partners(LPs)will need time to work through imbalances in their portfolios brought on by market swings and a slowdown in cash back from previous commitments.The short-term cash squeeze Figure 3:The curr
36、ent macro environment poses a range of significant challengesSource:Bain&CompanyTrends underwayPotential for delayedimpactLoss of Russia andUkraine markets andassetsNaturalresourceshortages Global foodpricing andsupplydisruptionCascadingsupplyshortfallsMountinginflation andrecessionrisksFinancialmar
37、ketinstabilityRealeconomyslowdownTechnologicaldisruptionGeopoliticalrealignment6Global Private Equity Report 2023 will make it difficult for them to extend new commitments,especially after several years of record-breaking allocations to private equity.Raising new capital will be particularly hard fo
38、r midsize generalist funds as LPs continue to favor specialists and large funds with top-tier performance.The same could be said for general partners(GPs)challenged to generate distributions because their exit volume is dependent on the(now-moribund)market for initial public offerings.How long these
39、 conditions will last is impossible to predict with any accuracy.But amid the short-term gloom,there is nothing to suggest the long-term outlook for private capital is any less positive than it was in 2021.Indeed,after attracting an astonishing$10.7 trillion in capital over the last decade,the indus
40、try may be getting even more appealing as investors continue to chafe at the limitations of the public markets.The number of US public companies has declined by about a third over the last 25 years,and the remaining pool is dominated by a handful of large tech firms that hold disproportionate sway o
41、ver the indexes.That makes it increasingly difficult to find adequate diversification in the public markets.Private market returns,meanwhile,are outpacing public returns over every time horizon,while alternative funds provide access to the broad global economy and the fullest range of asset classes.
42、These advantages explain why private markets continue to grow relative to the public markets.Figure 4:With inflation hitting its highest levels in 40 years,most private equity fund managers are in uncharted territoryNotes:Shows quarterly growth rate from the same period in the previous year,not seas
43、onally adjusted;tenure estimated using data across the 30 top buyout firmsdetermined by cumulative fund-raising totals over the last 10 years Sources:US Bureau of Labor Statistics(data through July 1,2022);Bain AuraSM talent analytics platform;Bain analysisUS Consumer Price Index growth rate(all ite
44、ms,quarterly rolling annual percentage change)051015%01020 2219601980 avg.CPI:5%19812008 avg.CPI:3%4%2009Q2 2021avg.CPI:1%2%Most senior partner or fund managing directorPartner or fund managing directorPrincipal/director/VPAssociateAvg.tenure7Global Private Equity Report 2023 GPs are stok
45、ing that growth through ongoing product innovation.They have steadily developed new types of fund structures across asset classes,helping the industry become increasingly attractive to LPs with highly specific allocation requirements.While buyout remains the industrys largest asset class,a variety o
46、f others have been growing at double-digit rates(see Figure 5).GPs are also diversifying their sources of growth by structuring products for massive,but relatively less penetrated,pools of capital like sovereign wealth funds and wealthy individual investors.History suggests that clear sight linesnot
47、 ideal economic conditionsare what will bring the energy back to dealmaking.If interest rates remain higher,GPs can work with that;if uncertainty persists,so will the hesitancy to commit.The industry ended 2022 with a record$3.7 trillion in dry powder,so GPs will be eager to put it to work as soon a
48、s possible.But buyers,sellers,and lenders are all looking for clearer signals about where GDP is headed and how much further the rates hikes have to go.The lessons from the last downturn are particularly useful in plotting a course through this time of uncertainty and turbulence.Put succinctly,the w
49、inners didnt panic last time around.They properly assessed their risk scenarios,created mitigation plans,and set themselves up to accelerate out of the downturn.This has implications for both dealmaking and portfolio management.Mitigating risk.Confidence boils down to learning how to underwrite risk
50、 in a time of great macro uncertainty.This confidence flows from a different set of muscles than most GPs are used to exercising.Figure 5:Buyout continues to expand,but most other alternative asset classes have been growing faster over the last decadeNotes:Buyout category includes buyout,balanced,co
51、investment,and coinvestment multimanager funds;other category includes fund-of-funds,mezzanine,natural resources,hybrid,private investment in public equity,and real assetsSource:Preqin Global AUM by asset type($T)2012$3.5T134.0144.1154.4164.7175.5186.3197.4209.22111.6Q2 2212.811%24%12%10%20%16%18%29
52、%CAGR2012Q2 22Buyout15%TotalVenture capitalOtherReal estateGrowth equitySecondariesInfrastructureDirect lending8Global Private Equity Report 2023 Deal teams have become increasingly specialized over the past cycle and may have a keen understanding of how to evaluate the micro forces impacting a targ
53、et company.But once every 10 years,macro matters a lotas the danger increases that the world will shift under your feet.The due diligence challenge is to analyze with specificity how these shifts might impact your company and its industry.There may be 10 macro factors out there disrupting global act
54、ivity,but chances are,only 2 or 3 of them really matter for your deal.The question then becomes,what is the range of scenarios or possible outcomes relative to those critical few macro factors,and what is your mitigation plan for each scenario?This process is about considering a fan of possible outc
55、omes(not just the one or two most likely)and thinking through whether the fan is asymmetrically good or bad.The winners last time around used this kind of insight to get back in the game as quickly as possible.The data is clear:Deals done through a downturn generate superior returns over time(see Fi
56、gure 6).Leaders keep finding deals that they like and can underwrite confidently by making sure the macro factors are accounted for.They also stay aggressive and arent deterred by lingering adverse capital conditions.If a deal targets a good asset at a good price,it may be worth getting it done with
57、 more equity or a higher price on the debt than youd like.You can always fix the balance sheet when conditions improve,but waiting risks losing a valuable opportunity to profit from the rebound.Figure 6:Investments made coming out of a downturn typically generate superior returns over timeNotes:Incl
58、udes fully and partially realized deals;all figures calculated in US dollars;post-2018 data not shown,as most deals entered later than 2018 arestill unrealizedSource:DealEdge powered by CEPRES data(as of December 22,2022)Global buyout deal IRR by year of entry42%523969100025014
59、00248033704208220922851622172018Top quartileMedianBottom quartile025255075100%Tech bubbleGlobal financial crisis9Global Private Equity Report 2023 Preparing companies to win.Within the portfolio,overreaction is deadly.When the cycle turns,the impulse is to start sell
60、ing the furniture at portfolio companies and slashing costs to the bone.That may shield the balance sheet for a while,but it will inevitably cripple performance.While it makes practical sense to conserve cash,draw down lines of credit,and otherwise build a war chest for surviving a recession,its als
61、o important to look for opportunities to stay on offense.Accelerating out of recession starts with taking a fresh look at a portfolio companys competitive position and plotting how to use the downturn to take market share from competitors.Accelerating out of recession starts with taking a fresh look
62、 at a portfolio companys competitive position and plotting how to use the downturn to take market share from competitors.This always depends on subsector dynamics and the strength of the competition.But the companies that are prudently aggressivevs.conservative and reactiveare the ones that shift pr
63、ofit pools during recessions.Discerning opportunity,while mustering the wherewithal and courage to go after it,ends up generating superior performance over time.Now for a more detailed look at what happened in 2022.InvestmentsWhile alternative investments overall trended downward in 2022,the buyout
64、and growth categories took the brunt of the macro headwinds.Buyout blues.Global buyout value(excluding add-ons)totaled$654 billion for the year,a 35%decline from 2021.Overall deal count,meanwhile,fell 10%to 2,318 transactions(see Figure 7).In terms of value,2022s was still the second-best performanc
65、e historically.But thats because of the extraordinary momentum in the years first half.Coming off 2021,when the industry completed deals worth$1 trillion,dealmakers charged into the first few months of 2022 seemingly intent on generating another trillion-dollar year.But when central bankers around t
66、he world began tightening down to combat persistently high inflation,second-half activity fell off precipitously in every major region(see Figure 8).The especially sharp drop-off in Asia-Pacific dealmaking reflects repeated market shutdowns due to Covid restrictions.Buyout count fell or growth was m
67、uted across all sectors,although technology retained its nearly 30%share of all buyout deals globally(see Figure 9).10Global Private Equity Report 2023 Figure 7:Global buyout value dropped by more than a third in 2022 as banks veered away from large transactions over the summerFigure 8:Buyouts conti
68、nued to soar globally in early 2022,but momentum slowed substantially across regions in the second halfNotes:Excludes add-ons;excludes loan-to-own transactions and acquisitions of bankrupt assets;based on announcement date;includes announced deals thatare completed or pending,with data subject to ch
69、ange;geography based on targets location;average deal size calculated using deals with disclosed value onlySources:Dealogic;Bain analysisGlobal buyout deal value,by region02004006008001,000$1,200B01,0002,0003,0002005295256724453064580761,0121,2452265496406
70、7254940769447608921613295310Avg.deal size($M)2022 vs.201721 avg.30%27%22%33%47%12%35%NorthAmericaTotalEuropeAsia-PacificRest of world28%59%72%2022 vs.2021 Deal countChange in deal valueNotes:North America and Europeexcludes add-ons;excludes loan-to-own transactions a
71、nd acquisitions of bankrupt assets;based on announcement date;includes announced deals that are completed or pending,with data subject to change;geography based on targets location;Asia-Pacificincludes buyout,growth,early-stage,private investment in public equity,turnaround,and other deals;excludes
72、real estate;excludes deals with announced value less than$10 million;includes investments that have closed and those at agreement-in-principle or definitive agreement stageSources:Dealogic;AVCJ;Bain analysisNorth AmericaEuropeAsia-PacificBuyout deal value,quarterlyBuyout deal value,quarterlyBuyout a
73、nd growth deal value,quarterly 050100$150B00Count0255075100$125B00Count050100$150B0200400600800Count20222Global Private Equity Report 2023 The banking industrys reluctance to lend to large leveraged transactions starting in midsummer dictated ho
74、w the year in dealmaking ultimately unfolded.As yields rose sharply,the number of syndicated loans for leveraged buyouts dropped like a rock.Across the US and Europe,leveraged loans fell 50%to$203 billion as volume plummeted in the years second half(see Figure 10).The result was a decline in the sor
75、t of large,high-leverage transactions that have buoyed deal value for years.Average deal size fell 23%to$964 million after climbing steadily every year since 2014 to a record high in 2021 of$1.2 billion(see Figure 11).With the banks essentially closed for business,smaller transactions requiring less
76、 debt picked up share in the overall totals.GPs turned to direct lenders such as Sixth Street Partners and Ares Credit Group to finance 80%of all middle-market loans during the year(see Figure 12).The appeal and feasibility of smaller deals can be seen in the growth of add-ons,deals that are finance
77、d from the balance sheet of a portfolio company,usually to expand its footprint or add an adjacency.Add-ons made up 72%of all North American buyouts in 2022 by deal count,and a growing share of them were used to further buy-and-build strategiesmultiple arbitrage plays where a GP buys smaller compani
78、es at lower multiples to build them into a larger one that will command a higher valuation(see Figures 13 and 14).Figure 9:Growth was down or muted across all sectors,although technology still accounted for almost 30%of all buyout deals globallyNotes:Excludes add-ons;excludes loan-to-own transaction
79、s and acquisitions of bankrupt assets;based on announcement date;includes announced deals thatare completed or pending,with data subject to changeSource:DealogicGlobal buyout deal count,by sectorTechnologyIndustrialsServicesHealthcareConsumer productsFinancial servicesUtilities and energyMedia and e
80、ntertainmentRetailTransportationReal estateTelecommunicationsPublic sector12%5%3%15%24%1%3%5%24%3%2%27%13%142.322152.121161.921172.121182.225192.127201.829212.529222.328102.017112.118122.319132.122Techsshare oftotal(%)2022 vs.202112Global Private Equity Report 2023 Figure 10:As monetary policy tight
81、ened globally in 2022,banks pulled the plug on loans for large leveraged buyoutsNotes:European institutional spread includes all tracked LBO deals,regardless of size;US large corporate defined as LBOs with more than$50 million in EBITDA;Europe syndicated loan volume converted to US dollars using EUR
82、/USD conversion rate of 1.076Source:LCDLBO yieldSyndicated LBO loan issuance($B)2012$90B55500350%02468%2012 8192021226.8%5.9%US large corporateEuropeUSEuropean institutionalFigure 11:Although average deal size remained high,the financing squeeze
83、 meant smaller deals gained shareNotes:Includes deals with disclosed value only;excludes add-ons;excludes loan-to-own transactions and acquisitions of bankrupt assets;based onannouncement date;includes announced deals that are completed or pending,with data subject to changeSources:Dealogic;Bain ana
84、lysisShare of global buyout deal count,by deal size020406080100%20052566520976120819211,24522964064940747608293310Avg.deal size($M)Less than$0.1B$0.1B$1B$1B$2.5B$2.5B$5B$5B$10BMore than$10B13Global Private Equity Report 2023 Figure 12:Direct lenders provid
85、ed 80%of the financing for middle-market buyouts in 2022Notes:Middle market includes issuers with revenue less than$500 million and total loan package less than$500 million;direct lending includes nonsyndicatedfacilities,including club lendingSource:RefinitivUS middle-market LBO loan issuance,by deb
86、t type($B)8%18%2014$32B366362Direct lendingsshare of total(%)CAGR201422Syndicated debtDirect lendingFigure 13:Add-ons continued to dominate deal count,making up 72%of all North American buyout transactions in 2022Notes:Primary deals defined as buyout acqui
87、sitions intended to stand alone or serve as a platform for add-on acquisitions;deal count includes completed dealsthat have at least one equity investor listed as an acquirerSources:SPS by Bain&Company;Bain analysisShare of North American buyout deal count,by deal type 020406080100%208192
88、021227+7Change in share(percentage points)2022 vs.201721 avg.PrimaryAdd-ons14Global Private Equity Report 2023 While GPs have gravitated to add-on and buy-and-build strategies in ever greater numbers,it remains to be seen whether these moves will pan out for all of them.In our experience in over 30
89、years of doing coinvestment deals,buyers tend to underestimate the due diligence and integration challenges.The commercial logic of rolling up small companies in a fragmented industry is no doubt compelling.Yet it is critical to be rigorous about how the pieces fit together.The GPs and portfolio com
90、panies getting it right start every acquisition process with a clear,testable thesis for how the deal will make the platform company more valuable over time.Theyre also careful not to let the commercial appeal obscure issues like organizational and cultural fit.Identifying synergies is essential,but
91、 so is defining how and when they will be achieved and how much risk there is that the savings might not materialize.Mitigating that risk involves drawing up a detailed integration plan to bring execution risks to the surface early.Growth on pause.A year ago,the growth equity and late-stage venture
92、segments were on fire.But,like buyout,these funds saw a large decline in activity in the second half of 2022.Overall,deal value dropped 28%to a rounded$644 billion(see Figure 15).Growth deals dont rely as much on bank debt as buyouts do.But growth and venture funds faced a number of their own challe
93、nges.The first is math:Rising interest rates reduce the value of future Figure 14:Add-ons increasingly serve buy-and-build strategies as dealmakers create large,high-multiple platforms from small,lower-multiple acquisitionsNotes:Global add-on dealssequence represents the year in which add-on was acq
94、uired;Multiplesincludes buyout deals only with investment date betweenJanuary 1,2010,and December 15,2022;includes fully realized,partially realized,and not realized deals;low number of$1 billion-plus deals limits year-over-yearcomparison of largest deals;deal size ranges based on equity check sizeS
95、ources:PitchBook;DealEdge powered by CEPRES dataShare of global add-on deals,by sequence forplatform companyGlobal median EV/EBITDA multiple,by target dealsize at acquisition,201022 051015x+59%$0$49M8.1$50M$99M8.9$100M$249M9.9$250M$999M11.1$1B+12.9020406080100%201213 14 15 16 17 18 19 20 21 221st ac
96、quisition2nd acquisition3rd acquisition4th acquisition5th+acquisition15Global Private Equity Report 2023 earnings,which has a disproportionate effect on the value of fast-growing companies for which the expected cash flow bonanza is somewhere in the future.This math challenge was exacerbated by a se
97、cond factor:investor recalibration.Much of the technology segments momentum in 2021 and early 2022 stemmed from a Covid effectthe notion that demand within areas like e-commerce,work-from-home,and cybersecurity had been pulled forward,accelerating the penetration curves of many companies.As the pand
98、emic waned,these predictions often began to appear overly optimistic,especially in a world where the cheap capital being used to inflect growth was going away.That and growing concern about an economic downturn chipped away at animal spirits.A third factor has been GP conservatism.As the availabilit
99、y of fresh growth capital suddenly became suspect,many GPs have asked management teams to ease off the throttleeven if just a bitto conserve precious cash.Thats a recipe for more resilient balance sheets,but,like the other factors,it called into question future growth prospects,eroding valuations th
100、at relied on those expectations.The end result was fewer companies taking on new funding at attractive multiples.Lower valuations have put growth and venture funds in a holding pattern.Not only have the companies they acquired in recent years come down in value,making buyers and sellers reluctant to
101、 transact,Figure 15:Growth and late-stage venture investing also dropped significantly in 2022s second half Notes:Late-stage venture capital defined as financing by a VC firm in Series B through Series Z+rounds and/or more than five years after the companys foundingdate;growth equity defined as a no
102、ncontrol,equity investment by a PE firm into a company,with cash received by the companySource:PitchBookGlobal capital invested,by investment stage,quarterly($B)$94B87396260223189126105Growth equityLate-stageventure capitalEarly-stageventure capital2020202Global Priv
103、ate Equity Report 2023 but the IPO markets are virtually shut down,dramatically slowing the growth of the markets favorite exit channel.Deal activity is unlikely to recover until valuations return to previous levels or enough time passes that assets are able to grow into their earlier valuations by
104、generating higher earnings at lower multiples.Whats clear is that the falloff in deal activity across alternative asset classes has done nothing to help the industry whittle away at its mountain of unspent capital.Dry powder continued its decade-long growth streak and rose to a new record of$3.7 tri
105、llion in 2022(see Figure 16).Buyout dry power finished 2022 at$1.1 trillion.Growth fund dry powder was just under$350 billion.Although growth valuations have been moving lower,buyout multiples,at least in the US,have held steady(see Figure 17).Taking a cue from Europe,they are starting to ease off i
106、n the current environment,but several factors are giving US multiples more support than the deal numbers would suggest.First,because dry powder is so plentiful,any high-quality deal remains competitive.A full 65%of North American buyouts in 2022 attracted multiple bidders or involved a formal auctio
107、n process.Second,owners in this environment are only offering up companies that will command a premium.For their part,buyers are still willing to pay up for a deal if they have real conviction.Were seeing more transactions financed with 70%equity and 30%debt instead of the usual 50-50 structure.Figu
108、re 16:Global dry powder has been stacking up for almost a decade and set another record in 2022Notes:Buyout category includes balanced,coinvestment,and coinvestment multimanager funds;other category includes fund-of-funds,mezzanine,and hybrid;discrepancies in bar heights displaying the same value ar
109、e due to roundingSource:PreqinGlobal private capital dry powder,by fund type($T)20%105%9%45%57%13%55%25%62%91.241101.140111.137121.135131.434141.435151.536161.735172.036182.336192.535203.133213.229223.7292005$0.6T44060.944071.143081.242Buyoutsshare oftotal(%)2022 vs.201721 avg.Buyout39%TotalReal est
110、ateVenture capitalGrowthInfrastructureDirect lendingSecondariesDistressed PEOther17Global Private Equity Report 2023 Funding that debt can be expensive,but to get quality deals done,GPs are kicking these debt issues down the road,confident that,when the conditions improve,they can restructure.As we
111、discuss elsewhere in this report,the logic of present value suggests that multiples arent likely to remain this high over the long term if interest rates continue to climb.As they trend downward,it will pay to be ready to pounce.ExitsIf investments fell precipitously in the second half of 2022,exits
112、 fell even harder.With every channel in decline,buyout-backed exits dropped 42%to$565 billion and showed weakness in regions across the globe(see Figures 18 and 19).Growth equity exits,meanwhile,plummeted by 64%to$312 billion(see Figure 20).Amid the sharp declines in public equities,the IPO market s
113、hut down almost completely in 2022,which was especially hard on the growth equity segment.Sponsor-to-sponsor deals dropped by 58%as lenders cut off financing for big transactions and PE buyers shied away from the still-high asking prices coming from other firms.Sales to strategic buyers were higher
114、than the five-year average,largely because corporate earnings proved to be relatively resilient throughout the year.But as macro uncertainty cast a gloom over the market in the second half,the strategic channel slowed and finished down 21%from 2021.Figure 17:Hot competition for scarce deals put upwa
115、rd pressure on average US multiples,though European multiples fell offSource:LCD Average EBITDA purchase price multiple for leveraged buyout transactions0.02.55.07.510.012.5xEurope2000 020406080220.02.55.07.510.012.5xUS2000 0204060802211.9x10.7x18Global Private Equity Report 20
116、23 Figure 18:Exits fell sharply in 2022 across channels,especially in the market for initial public offeringsNotes:Includes partial and full exits,bankruptcies excluded;IPO value represents offer amount and not market value of companySource:Dealogic Global buyout-backed exit value,by channel($B)0500
117、1,0001,5002,0002005$252B45994388204685655932337821IPO shareof exitvalue(%)58%21%94%42%26%38%4%88%2022 vs.201721 avg.2022 vs.2021 Change in exit valueSponsorto strategicTotalSponsorto sponsorIPOExit countFigure 19
118、:The exit slowdown extended globally across the major regions Notes:North America and Europeincludes partial and full exits,bankruptcies excluded;IPO value represents offer amount and not market value of company;average exit size calculated using exits with disclosed value only;Asia-Pacificincludes
119、buyout,growth,early-stage,private investment in public equity,turnaround,and other deals;excludes real estate;excludes deals with announced value less than$10 million;includes investments that have closed and those at agreement-in-principle or definitive agreement stageSources:Dealogic;AVCJ;Bain ana
120、lysisNorth AmericaEuropeAsia-PacificBuyout-backed exit value,quarterlyBuyout-backed exit value,quarterlyBuyout,growth equity,and venturecapital exit value,quarterly050100150$200B0100200300Buyout exit count0204060$80B050100150200Buyout exit count02040$60B050100150200Exit count2022120222020
121、202Global Private Equity Report 2023 Some of the slowdown in 2022 can probably be attributed to GPs pulling exits forward into 2021 to take advantage of surging deal activity and multiples.But faced with less-than-favorable market conditions in 2022,many GPs were simply unwilling to part
122、with promising assets that were coming under short-term pressure.A good example is a fund that invests in companies that are particularly reliant on human capital.With labor costs on an inflationary spiral upward,margins across the portfolio were compressed by about 300 basis points.That meant fund
123、managers were going to have to play catch-upraising prices,boosting revenue,or taking market share to get EBITDA back to where they had projected it would be in the deal model.All of that would take time.They did consider whether to sell some companies on the original time clock and take the hit on
124、returns.But it made more sense to get with LPs and agree to delay those exits until conditions improved.That mindset is an important vestige of the last downturn.GPs say the mistakes they made after the global financial crisis can usually be traced to letting go of assets too quickly rather than doi
125、ng what they could to hang on and ride out the storm.If its a decent company,they found,it will recover and the fund will make a return.Given this kind of thinking,its likely that hold periods for exited companies will stretch in 2023 if the economy stalls out.That may protect returns over the longe
126、r term,but for now,extended hold Figure 20:Growth and venture exits also fell precipitously as the IPO window slammed shutNotes:Includes deals with a growth equity round prior to exit;includes PE-backed growth equity and VC-backed growth/expansion,venture growth,and late-stageVC;excludes investor bu
127、yout by management and merger of equals;majority of reverse mergers are SPAC-related transactionsSource:PitchBookGrowth equity and venture capital exit value,by exit type0200400600800$1,000B01,0002,0003,0004,00020822203722720630114183
128、6715IPO shareof exitvalue(%)76%47%50%83%64%44%20%29%32%29%Merger acquisitionTotalBuyout/LBOIPOReversemerger2022 vs.201721 avg.2022 vs.2021 Change in exit valueExit count20Global Private Equity Report 2023 periods will inevitably make it harder for LPs to fund new commitments from exit-driven liquidi
129、ty.That means tools like GP-led secondaries and continuation funds will remain an important way for investors to find liquidity when they need it.But as with private markets generally,strong allocations to secondary funds in recent years are already limiting new commitments to these vehicles.Fund-ra
130、isingWhile the long-term outlook for fund-raising remains exceedingly bullish,the environment for attracting new capital in 2023 will be considerably less so.For a variety of reasons,LPs are tapped out,and the cash squeeze they are facing will make it difficult to ramp up commitments in the coming m
131、onths.Largely on the back of a strong-ish first half,alternative managers around the globe raised$1.3 trillion in private capital during 2022,down 10%from 2021 but still the second-highest total ever.That brought the five-year total to a staggering$6.4 trillion,dwarfing any five-year period in the i
132、ndustrys history(see Figure 21).The slowdown reflects a couple of dynamics.The total number of buyout funds closed in 2022 skidded 43%from 2021 as most firms found it increasingly difficult to raise new capital.The total value of buyout capital raised,however,dropped a less-onerous 16%because macro
133、jitters forced LPs further into the arms of the largest,most experienced funds,which raised more money than ever(see Figure 22).Figure 21:Global fund-raising reversed course in 2022,but the total raised was still the second highest everNotes:Buyout category includes buyout,balanced,coinvestment,and
134、coinvestment multimanager funds;includes closed funds only and represents the yearin which funds held their final close;excludes SoftBank Vision Fund;excludes natural resourcesSource:PreqinGlobal private capital raised,by fund type($B)Close year2003$106B042907670087090932124481
135、359261,058171,149181,097191,291201,233211,486221,3325%6%0%12%37%8%46%2%26%11%BuyoutTotalVenture capitalSecondariesReal estateInfrastructureDistressed PEGrowth equityDirect lendingOther16%10%14%15%11%17%22%21%20%11%2022 vs.2021 2022 vs.201721 avg.21Global Private Equity Report 2023 Activit
136、y slid across all major regions(see Figure 23).Growth equity and real estate funds also had a significant drop-off.But infrastructure funds,which investors view as less cyclical,saw a 22%increase.The pressure LPs are feeling has several components,most notably the unprecedented flood of capital devo
137、ted to private equity in recent years.Not only has the amount been monumental,but the velocity of commitment has been accelerating steadily.For buyout funds,the average period between successive funds(first to second generation,third to fourth,etc.)has dropped 35%over the last decade as GPs circle b
138、ack every three years instead of five.They are also asking for more money each time50%more in 2022 than for predecessor funds(see Figure 24).All of that was fine as long as GPs could recycle a steady amount of capital by maintaining high levels of distributed to paid-in capital(DPI).But as exitsand
139、the outlook for exitsslowed sharply in 2022,GPs had to pare back distributions.LPs were already stretched,and the slowdown in DPI created new liquidity issues.That precluded making further commitments until cash flows improved.Judging by the past downturn,LPs will likely see buyout funds hang onto m
140、any companies for an incremental year or two.But thats hard to gauge given that its not even clear what the shape of a downturn would be.Add to all of these factors the“denominator effect,”where declines in public equity valuations make the size of private equity allocations in LP portfolios look ou
141、t of whack,and it is unlikely the pace of fund-raising will pick up any time soon.Figure 22:Investors long preference for large funds with established track records is unlikely to wane amid market uncertaintyNotes:Buyout category includes buyout,balanced,coinvestment,and coinvestment multimanager fu
142、nds;analysis includes funds with GP experience data(fund number)and final close values;represents the year in which funds held their final close;excludes SoftBank Vision Fund;“funds reaching target”and“aggregate target exceeded by”calculations only include funds for which target and close size data
143、is availableSources:Preqin;Bain analysisMegafunds share of total global buyoutcapital raisedClose year201519%232257Fund typeExperiencedmegafunds(greater than$5B)Experiencedfunds under$5BFirst-timefundsShare ofcapitalraised,2022Funds reachingtargetAggregatetargetexceededby4%39%5
144、7%93%53%48%2%15%9%(aggregateraised undertarget)22Global Private Equity Report 2023 Figure 23:Buyout fund-raising declined across all major regions,with the smallest falloff in North AmericaNotes:Buyout category includes buyout,balanced,coinvestment,and coinvestment multimanager funds;only includes f
145、unds with final close data;excludesSoftBank Vision FundSources:Preqin;Bain analysisBuyout capital raised,by investment region focus($B)Close year2003$46B0472056408269094428944420357222 vs.201721 avg.North AmericaTotal18%5%23%21%80%52%
146、94%EuropeAsiaDiversified multiregionalMiddle East and AfricaCentral and South AmericaFigure 24:Investment has accelerated over the past decade as general partners come back sooner and ask for moreNotes:Series funds limited to those with successor funds categorized as buyout funds;buyout category inc
147、ludes buyout,balanced,coinvestment,andcoinvestment multimanager funds;for funds with multiple series,time between series calculated for funds within the same series;vintage year defined as the first year of investment/drawdown from the investor Source:PreqinAverage years between predecessor and succ
148、essor fund vintages,global buyout fundsVintage year of successor fund35%20135.028223.250145.518154.833164.627174.037183.843193.750203.544213.248Median increasein size frompredecessor(%)23Global Private Equity Report 2023 As in any downturn,the scarcity of capital will mean roughly a quarter of funds
149、 now in the market wont raise again.But for GPs generally,the pace and volume of fund-raising over the past several years has left funds flush with fresh capital:A full 86%of large buyout firms have closed a flagship fund or held an interim close over the past three years,and almost half have closed
150、 in the past two(see Figure 25).Growth flagships are similarly flush.Those that have raised recently can wait,earn fees,and choose their targets carefully as the economy works through this down cycle.LPs,too,have learned that extra patience is a virtue during these periods.Fund vintages invested in
151、the year or two after a downturn have outperformed historically,generating strong distributions over time.As LPs cut back,established funds at the top of the market will inevitably continue to claim the largest share of the reduced pie.The trend toward specialization and away from generalist funds i
152、s also sure to continue.The vehicles getting funded in this environment are those that can help LPs meet specific objectives through true expertise in a narrow slice of the marketnot just software,say,but a clearly defined set of three software subsectors that sell only mission-critical applications
153、 to fast-growing service companies.Funds that can demonstrate they are the smartest player in a given space by finding high-quality deals and delivering them to investors are the ones standing out in a crowded field.Figure 25:Most large firms have closed a flagship fund in the last three years,makin
154、g it easier to weather a slowdownNotes:Buyout category includes buyout and balanced funds and excludes coinvestment and coinvestment multimanager funds;analysis limited to flagship fundsof top 50 buyout firms as defined by aggregate capital raised over the last 10 years;excludes single-deal funds,fu
155、nds not designated as“funds in series”perPreqin,and/or funds missing close-date data Sources:Preqin;Bain analysisTime since last close for flagship funds,top 50 global buyout and growth equity firms100%Buyout flagship funds24%24%14%24%6%8%Growth flagship funds40%34%10%6%4%6%Within the last year12 ye
156、ars ago23 years ago3+years,currently raising,interim close3+years,currently raising,no interim close3+years,no raise announced24Global Private Equity Report 2023 One thing is becoming ever more apparent:The long-term opportunity private equity presents may be bigger than the traditional sources of c
157、apital can support.That explains why the industry has been so assiduously expanding relationships with the massive sovereign wealth funds in capitals around the world and seeking to tap the legions of individual investors who control half of all wealth globally.Its also clear that there are plenty o
158、f places to put the money.As technology continues to transform sectors like healthcare and finance;as innovation builds in areas like artificial intelligence,web3,and big data;and as the energy transition accelerates,the demand for private investment capital stands to grow exponentially over the nex
159、t 20 years.The coming year will likely turn out to be a pause in the action,but private equitys long-term appeal to investors is secure.ReturnsIn the decade leading up to 2022,surging values of US public equities had closed the historical gap with private equity returns.But that trend ended abruptly
160、 last year when public markets tanked globally and private valuations held upat least through the third quarter,the latest industrywide data available by the time of publication(see Figure 26).While the S&P 500 closed 2022 down 19%and the MSCI Europe Index finished the year with a 17%decline,valuati
161、ons for the private equity holdings of the largest public alternative asset managersFigure 26:Historically,buyout funds have generated higher returns than public markets,especially in 2022 as public markets tankedNotes:Data for US and Asia-Pacific calculated in US dollars;data for Europe calculated
162、in euros;public index comparison uses ICM IRR method,which assumesbuying and selling the index according to the timing and size of cash flows between the investor and the private investmentSource:Burgiss End-to-end pooled net IRR(as of Q3 2022)for Western EuropeAsia-PacificUS20100102030%151020Invest
163、ment horizon(in years)20100102030%151020Investment horizon(in years)01020201030%151020Investment horizon(in years)Buyout fundsMSCI Europe PMEBuyout funds S&P 500 PMEBuyout and growth fundsMSCI Asia-Pacific PME 25Global Private Equity Report 2023 Blackstone,KKR,Apollo,and Carlyleall held up better(se
164、e Figure 27).In fact,two of the four posted gains over the year.Buyout funds more broadly posted some write-downs in the second and third quarters,but nothing to match the downturn in public equities.The question these results raise is whether private equity valuations will follow the public markets
165、 south when fourth-quarter marks are eventually tallied this spring or later in the year if the economy tumbles into recession.Trend lines for public and private valuations have generally shadowed each other since the Financial Accounting Standards Board issued its 157 ruling in 2006.And that has se
166、t the expectation that bad news regarding the valuation of private holdings is only a matter of time.Many LPs are bracing for the worst.Those surveyed by Preqin in 2022 said overwhelmingly that private equity had met or exceeded their performance expectations during the year.But 60%were expecting pe
167、rformance to deteriorate in 2023 amid the signs of an economic slowdown(see Figure 28).Its true that the fourth quarter is typically when the most pronounced adjustments to portfolio company valuations occur.There is one audited appraisal required annually,and that typically happens as funds wrap up
168、 their year.These should be the most reliable estimations of value that investors see in any 12-month period.Data from Burgiss,a private capital data and analytics provider,confirms that if changes are on the way,they are most likely to show up in the fourth quarter.But the analysis also shows that
169、the magnitude Figure 27:The dramatic slide in public markets during 2022 was not echoed in private equity markets through the third quarterNotes:S&P 500 and MSCI Europe indexes are average weekly close values;Carlyle based on corporate private equity carry fund appreciation;KKR based onprivate equit
170、y flagship funds gross returns;Apollo and Blackstone based on PE fund appreciation Sources:Refinitiv;company websites(most recent quarterly earnings call presentations and transcripts,as of November 8,2022)Public equityS&P 500 IndexMSCI Europe IndexFirms PE valuation change vs.previous quarter(%)Pri
171、vate equity1,0001,5002,0002020202120222,0003,0004,0005,00020202021202219%(2022)17%(2022)0302010102030Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4202020212022ApolloBlackstoneKKRCarlyle26Global Private Equity Report 2023 of change is typically not that dramatic.Close to 60%of the time over the past decade,the
172、fourth-quarter adjustment has been less than 10%one way or the other(see Figure 29).Change greater than 20%occurs only 21%of the time.Burgiss analysis also calls into question the notion that 2022 represents a sudden break in the historical relationship between public and private valuations.In fact,
173、a gap may have been developing for years.If you chart quarterly changes in buyout fund valuations against movement in public indexes(indexing them to the fourth quarter of 2019,right before Covid-19 hit),a divergence shows up right away.Private valuations over that period,especially for hot sectors
174、like healthcare and technology,have consistently outpaced those set by public markets in the US and Europe(see Figure 30).The conclusion one might draw from this data is that GPs are simply overvaluing their assets.But,if anything,new analysis shows that GPs skew toward the conservative.Over the pas
175、t decade,buyout funds have exited assets at valuations exceeding their last quarterly mark nearly 70%of the time(see Figure 31).If fund managers err,in other words,it is on the side of promising less and delivering more,not the other way around.Of course,fourth-quarter marks may yet bear out industr
176、y concerns.But its just as plausible that private equity performance may continue to hold up better than expectedespecially given the Q4 performance weve seen from the large public firms.Figure 28:Private equity returns met LP expectations in 2022,but 60%expected worse performance in 2023Source:Preq
177、in investor interviews(December 201822)Q:Has the performance of your portfolios in privateequity lived up to your expectations in the past year?Q:What are your return expectations for your portfoliosin the private equity asset class in the coming year?100%608040200100%608040200201819202122Exceededex
178、pectationsMet expectationsFell shortof expectations 201920212223Better performanceSame performanceWorse performance27Global Private Equity Report 2023 Figure 29:Buyout valuations shift most significantly in the fourth quarter,which is typically when annual audits happenNotes:Only includes holdings t
179、hat are at least 5%of respective fund size at the beginning of each quarter;includes all quarters from Q1 2012 through Q3 2022;near 0 category includes holdings with quarterly valuation change less than 0.05%;010%category includes holdings with quarterly valuation change greater than0.05%but less th
180、an 10%Source:Burgiss Percentage of buyout-backed portfolio holdings,by magnitude of quarterly valuation change(2012Q3 22)100%Near 0010%10%20%20%30%Greater than 30%Q126Q220Q326Q415Share of holdings withnear-zero quarterlyvaluation change(%)Figure 30:Buyout valuations accelerated after Covid-19 appear
181、ed and have proven more resilient than public markets in recent quartersSource:BurgissIndexed valuation based on pooled return,global buyout-backed holdings(Q4 2019=100)500Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3OtherS&P 500MSCIEuropeHealthcareIT2020202Global Private Equity Report 2023 One imp
182、ortant reason for optimism is the composition of private equity portfolios(see Figure 32).More than two-thirds of the 2022 decline in public equities was attributable to the plunging values of tech-related stocks,most notably Microsoft,Apple,Alphabet,Meta,and Amazon,which together lost 43%in 2022.Pr
183、ivate portfolios are also heavily invested in the technology sector,but it is a different kind of tech.A full 88%of the technology investments in buyout funds are software,which is significantly less volatile.These are mostly mature SaaS enterprise businesses with stable cash flows.They tend to be m
184、ore resilient in a downturn because their products are“sticky”either mission critical or deeply embedded in a companys operations.Private portfolios are also balanced by healthcare companies,which tend to hold up well in a recession.This period will test whether private equitys experience weathering
185、 the global financial crisis has taught fund managers the value of constructing portfolios that are resilient in a downturn.It will also challenge them to maintain superior returns without relying on the multiple expansion that has carried the industry for years.As the full impact of inflation and r
186、ising interest rates unfolds across the global economy,the coming months and years will likely see downward pressure on multiples.The top-tier firms will be those that can generate alpha from the inside out with value-creation strategies that boost margins and spur revenue growth.Figure 31:GP marks
187、have tended to be conservative,with around 70%of holdings exited at a higher valuation than the last quarterly markNotes:Sample includes holdings that exited at least 75%during the quarter;only includes holdings that are at least 5%of respective fund size at the beginning of each quarter Source:Burg
188、issPercentage of global buyout-backed portfolio holdings at exit,by count(2012Q3 22)100%Global buyout holdings at exit0-10%lower than last valuation010%higher than last valuationMore than 10%lower than last valuation10%30%higher than last valuation30%50%higher than last valuation50%100%higher than l
189、ast valuationMore than 100%higher than last valuationExit price29Global Private Equity Report 2023 What remains clear,however,is that the industry overall is well positioned for long-term growth and prosperity.Despite the recent drop-off in deal,exit,and fund-raising activity,2022 was still the seco
190、nd-best year in history,and the underlying fundamentals remain sound.This slowdown and the macro factors contributing to it will present real challenges.But,unlike the 200708 period,when the global banking system nearly collapsed,nothing appears fundamentally broken this time around.While all signs
191、point to a shift in the economic tide,the magnitude will be nothing the private equity industry hasnt dealt with before.Figure 32:While technology-related companies drove the public market decline,“tech”in private portfolios means software,which is more resilientNotes:Buyout deal initial equity capi
192、tal excludes real estate and Infrastructure deals;Nasdaq:CEG not included in nontech market cap totals due to IPO during 2022 Sources:S&P Capital IQ;DealEdge powered by CEPRES data;Bain analysisShare of 2022 S&P 500 market cap decline 020406080100%2022 full-year declineMicrosoft,Apple,Alphabet,Meta,
193、and AmazonTechother software and Internet servicesTechother hardwareNontech020406080100%TechnologyConsumerHealthcareIndustrialsMediaandtelecom HardwareSoftwareFinancialservicesBusinessservicesEnergy andnaturalresourcesGlobal buyout deal initial equity capital(201722)3030The pressure on private equit
194、y firms to decarbonize their portfolios only increased in 2022.Regulators,consumers,B2B customers,and investors all stepped up calls for change,meaning the risks and opportunities within portfolios have become critical focus areas for fund managers.At the same time,the race to develop new alternativ
195、e energy sources and other low-carbon solutions is shaping up to be a generational opportunity to put money to work.Companies supplying the technology,products,and services that will drive the shift away from carbon stretch across the global economy.They will need trillions in new capital as the wor
196、ld strives to ward off the worst of climate change.While ambiguity around regulation,the pace of change,regional politics,and other issues will continue,general partners(GPs)cannot let uncertainty deter action.The firms getting ahead of the pack recognize that managing through the energy transition
197、involves a dual imperative to play offense and defense.There are opportunities to win on both sides of the ball.Investing in the transitionIts easy enough to say the energy transition is opening up investment opportunities.But making sense of the evolving landscape is a challenge for any fund.The en
198、ergy transition sprawls across every sector of the economy and is as much an industrial challenge as a technological one.There are massive practical hurdles in taking such a large swath of the global A Private Equity Lens on the Energy TransitionThe global shift away from carbon-based fuels is gaini
199、ng momentum.Heres what it means for private investors.By Debra McCoy,Marc Lino,Deike Diers,David Hoverman,Grant Dougans,and Charlotte Mabe31Global Private Equity Report 2023 economy from A to B,along with deep uncertainty about business models that are heavily reliant on government subsidies and oth
200、er factors outside investors control.The pace and direction of change can vary across geographies and at the micro level.Politics is all too frequently a disruptive factor.Yet investors are finding the energy transition space increasingly attractive.Between 2017 and the first half of 2022,according
201、to PitchBook,buyout and growth equity funds had done energy transitionrelated deals with a total reported value of around$160 billion,the majority of it concentrated in the renewables and clean industries segments(see Figure 1).The funds finding their way to the most attractive deals arent simply tr
202、ying to increase broad exposure to the energy transition.They are investing with a clear strategy carefully calibrated to take advantage of their unique approach to creating value.Investment approaches can vary considerably based on both tactics and risk.But that means investors can dial in where th
203、ey want to play based on a firms mandate,expertise,and capabilities(see Figure 2).One practical way to think about risk in this space is to focus less on picking winners in these highly dynamic markets and more on finding the companies that are supplying data and tools to all competitors.The world w
204、ill need innovation in battery and storage technology,for instance,no matter who wins between Tesla and GM in the electric vehicle market.Similarly,as companies face increasing demands Figure 1:Private equity has focused its investments in the energy transition and clean industries segments,but carb
205、on tech is gaining momentumNotes:Represents companies that transacted in a leveraged buyout,add-on,or recap deal between 2017 and H2 2022 with an estimated enterprise value of at least$50 million and less than$750 million at the time of the deal;target count includes companies that are now publicly
206、traded or owned by a strategic buyerSources:Dealogic;PitchBook;SPS;Bain analysisClimate-related target count by sector,2017H2 2022100%2424272474268040200Energy transitionSustainable food systemsMobilityClean industriesEmissions monitoring and accountingImpact reduction and climate adaptat
207、ionCarbon trade and greenproject financing and supportBuilt infrastructureTotal=2,133CarbontechAgriculturalbiotechEnergystorageGrid managementHigh-efficiency electronicsAlternative fuelsOtherOtherOtherOtherOtherOtherRenewable energy generationAlternative foodsPrecisionagriculture/roboticsLow-greenho
208、use gas(GHG)fertilizers,etc.Vertical/urbanfarmingEnergy management systemsHigh-efficiency HVACLow-GHG constructionBatteriesEfficienttransport systemsLow-GHGroad transportLow-GHGshippingMicromobilityCircularity and recyclingLow-GHGchemicalsLow-GHG plasticsWaste managementEnterprise trackingSupply cha
209、in monitoringSustainability consultingDisasterpreventionWater(quality)managementWeathermonitoring,forecasting Carboncapture,storageSustainable financeOther32Global Private Equity Report 2023 to diagnose the sources and volume of carbon they emit,firms that can supply the software,tools,and services
210、to collect and organize that data should thrive.This explains the appeal of carbon-tech companies like Persefoni and Watershed.Over the last two years,these two firms have raised$101 million and$70 million,respectively,to fund expansion of software platforms that help companies achieve carbon transp
211、arency across their value chains and report the data effectively.(Disclosure:Bain has invested in Persefoni,and the firms have codeveloped a decarbonization manager to streamline companies scenario planning based on relevant subsector experiences.)Another example of a notable deal in this space is B
212、lackstones$1.4 billion acquisition in 2021 of Sphera,a software-as-a-service provider that helps companies manage ESG data.Due diligence amid the transition Ultimately,however,targeting the right company within these themes comes down to strong due diligence informed by deep expertise in these subse
213、ctors.Underwriting risk often boils down to assessing how technology,regulatory,and political considerations may impact a specific target company and when.Figure 2:The right investment play depends on a funds appetite for risk and capital intensity,as well as its value-creation focusSource:Bain&Comp
214、anyAsset classInvestmentplayRisk profileCapital/asset intensityCore industrialfocusValue-creationopportunityGrowthBuyoutInfrastructureGray-to-greentransformation:Mature assets shifting operations toreduce emissionsGreen energyoperators:Businesses directlyfocused on clean-tech/sustainability,with pro
215、ventechnologyPicks and shovels:Businessesoffering provenproducts that enablethe energy transitionTechnology of thefuture:Big bets on promising technologies with scientific and/orcommercial uncertaintyGreen servicechampions:Ecosystem of serviceenablers for greentransition(i.e.,distributors,maintenanc
216、e)Green digitalenablers:Enablingsoftware for thegreen transition(e.g.,sustainabilitymonitoring andreporting)Utilities,oil and gas,energy,manufacturingUtilities,oil and gas,energyManufacturingManufacturingProfessionalservices,contractorsSoftwareOperationalimprovements Operationalimprovements Operatio
217、nalimprovements Investments toreach scaleRollup/M&A;businessdevelopmentRapid growththrough customeracquisitionLowHighModerate33Global Private Equity Report 2023 Bain Capitals recent$400 million investment in EcoCeres,a biofuels company based in Hong Kong,is a good example.Biofuels can be highly depe
218、ndent on subsidies and other factors outside the control of investors.But Bain Capital gained confidence that EcoCeres had built a strong business model based on fundamentals.The company,which was incubated by Towngas,Hong Kongs first public utility,had developed a proprietary technology to convert
219、waste-based biomass into biofuels,biochemicals,and biomaterials.It targets segments that have yet to see significant electric vehicle penetration,like aviation and heavy-duty vehicles.Unlike many renewable fuel companies,EcoCeres also operates at industrial scale with three refineries in China.It is
220、 aimed at markets with clear regulatory tailwinds:European countries subject to the EUs Renewable Energy Directive II.The companys in-house technology,scale economics,and pricing power based on the sustainability value it delivers to customers give it the strong,defensible market position Bain Capit
221、al was looking for.It also offers additional ways to create value.Beyond its core biofuels emphasis,EcoCeres has opportunities to commercialize the industrial-scale production of other renewable chemicals and materials.And it has a robust R&D pipeline filled with value-added downstream products like
222、 green hydrogen.Given that Bain Capital only completed the deal in January 2023,its too early to measure results.But EcoCeres gives the firm a clear and promising path to profit from the energy transition.Underwriting risk often boils down to assessing how technology,regulatory,and political conside
223、rations may impact a specific target company and when.Underwriting risk and opportunities to create value within the energy transition involves all the usual due diligence considerations.But experience suggests that it also requires paying extra attention to several critical factors,such as:the impa
224、cts of regulation and subsidies on company actions and consumer preferences,recognizing they can vary significantly across narrow geographies;how different cost and production assumptions may affect customer and competitor behaviors,especially for technologies that may be substitutable for others;an
225、d the potentially nonlinear impacts of technology improvements,and how likely it is those impacts will occur and be disruptive.Disruptive potential is an especially tricky call.When one fund began looking into an agtech firms claims that its real-time soil analysis technology would make farmers more
226、 efficient and less energy 34Global Private Equity Report 2023 dependent,there was no question that the technology worked as advertised.It instantly gave a readout on chemical composition,moisture content,and a number of other crucial variables farmers need to know in order to plan effectively.The b
227、igger question was whether farmers really needed it.Customer inquiries showed that potential users were duly impressed by the technology but not enough to change their behavior.Large farms had in-house testing capabilities,and small ones were happy sending samples to outside labs.Revenues were growi
228、ng,but projections suggested that breakout growth wouldnt come within the deals time frame.The fund passed,recognizing that the market was happy enough with the status quo.Evaluating how market growth might affect a given target companys trajectory is also complicated,as one fund discovered in a sea
229、rch to tap into the rapid growth of residential solar.Unenthused by the economics of manufacturers and installers,it was attracted to a higher-margin solar finance company focused on lending to homeowners.Yet a closer look was sobering.The pressure to provide real-time approvals for these relatively
230、 long-term loans made credit risk a serious issue.While there was plenty of growth,the fund couldnt get comfortable and decided to look elsewhere.For Primavera Capital,however,tapping the growth of alternative energyin this case,a maker of wind turbines called Envision Groupinvolved a more nuanced a
231、ppraisal of growth potential.The companys strong historical performance reflected all the factors that have made the wind turbine business one of the most vibrant in the alternative energy sector.Yet from a diligence standpoint,the potential buyers needed to know how long that growth could continue.
232、The wind turbine market is highly cyclical and vulnerable to regulatory changes.While the overall market was still growing,installation of new turbines in a critical market had peaked because an important government subsidy was being phased out.That meant the market was bound to get more competitive
233、,raising a pair of questions:How defensible was Envisions position?And was it developing new revenue streams to offset potentially slower growth?Due diligence showed that the companys state-of-the-art products and technology,in addition to providing relative cost advantages,positioned it well to win
234、 share as the market matured and growth stabilized.And Envision had made timely investments in key adjacencies like energy storage and wind-farm operations.Those complementary new businesses promised to contribute significantly to gross margin through 2026 and to help improve customer stickiness.The
235、y also reduced the companys reliance on a single technology while protecting it from demand and regulatory shocks.In ownership,the diligence findings are playing out.Over the past year,Envision has won important new turbine contracts in Spain,France,and India,and it is investing heavily to establish
236、 itself as a go-to technology provider for net-zero industrial parks.It also operates four R&D centers globally to innovate new ways to capitalize on the emerging low-carbon industrial ecosystem.35Global Private Equity Report 2023 Playing offense and defense in the portfolioWhile the energy transiti
237、on promises to open up new areas for investment,it is also generating new risks and imperatives for PE portfolios.Between the demands of regulators,limited partners,lenders,and customers,demonstrable efforts to decarbonize are increasingly becoming table stakes for PE investment.Companies large and
238、small are under pressure to do more than make PR announcements about net-zero intentions.Investors and regulators are demanding that they establish clear emissions-reduction strategies that live up to standards and reporting protocols established by organizations like the Science Based Targets Initi
239、ative(SBTi)and CDP.Until now,private companies have faced less pressure to adopt carbon-reduction strategies than their public counterparts.This explains why data from EcoVadis,the worlds leading supplier of business sustainability ratings,in which Bain has an investment,shows that 53%of large publi
240、c companies achieve top scores for carbon management while only 35%of large private companies do(see Figure 3).But thats changing as companies encounter new rules focused on Scope 1 and 2 emissions(a companys direct emissions and those generated as a result of energy purchases),as well as Scope 3(em
241、issions generated up-and downstream in a companys value chain).Proposed US Securities and Exchange Commission regulations demanding that public companies report on Scope 3 emissions,for instance,Figure 3:Companies owned by private equity score slightly higher on carbon maturity than other private co
242、mpanies,but both trail their public counterpartsSources:EcoVadis;Dealogic;S&P Capital IQ;Preqin;Bain analysisNumber of companies by EcoVadis carbon maturity score100%Private37%45%16%7,3771.8PE owned28%47%25%2772.0$10M$1B companiesPublic23%43%29%4%5442.2Private5%22%38%26%9%1493.1$5B+companiesPublic8%
243、39%38%15%2203.6AveragescoreLeader(carbonmaturity score=5)Advanced(4)Moderate(3)Partial(2)Insufficient(1)36Global Private Equity Report 2023 would force private suppliers upstream to measure and report on their performance.They,in turn,would pressure their own suppliers,pushing the decarbonization im
244、perative even further across the economy.Failing to prepare for a future in which portfolio companies are under pressure to transition to net zero constitutes a real risk for GPs.The firms getting it right dont view the challenge as a mere box to check off.Defensively,they see it as a way to shield
245、the companys performance.Offensively,it is an opportunity to set up the company for exit by helping it define a pragmatic path to a cleaner future,with less exposure to regulatory risk.Making decarbonization work requires approaching the value calculation holistically.There are obviously costs to de
246、carbonization effortsoften substantial ones.But in experienced hands,those costs can be reduced by making the right choices about priorities and solutions.In this environment,PE firms and their portfolio companies need to ask themselves a couple of key questions.First,whats the potential downside of
247、 doing nothing about our carbon exposure?Second,how can we intelligently bring upside to the carbon challenge in the normal course of due diligence and value creation?Failing to prepare for a future in which portfolio companies are under pressure to transition to net zero constitutes a real risk for
248、 GPs.The carbon-reduction plan put in place at one large telecommunications company is a good example of how a well-rounded approach works.When the company was acquired a few years ago,top managers and their new private equity partners faced a complex challenge:how to balance their growth and carbon
249、-reduction ambitions.Investors and debtholders wanted growth and a clear decarbonization strategy.Major customers,meanwhile,were demanding explicit carbon-reduction commitments tied to SBTi standards and CDP reporting requirements throughout their supply chains.Those demands put as much as 20%of the
250、 companys revenue at risk by 2021,prompting leadership to draw up an aggressive strategy to reduce Scope 1 and 2 emissions to net zero by 2030 and Scope 3 to net zero by 2045.Like most companies,this one lacked a comprehensive system to capture emissions metrics.So the first step was establishing a
251、baseline for Scope 1,2,and 3 emissions across the organization.Then,the company used marginal abatement cost curves to identify the highest-impact initiativesthose that would both achieve emissions targets and minimize cost to the company.It also identified opportunities to deploy tools like hydroge
252、n generators that werent ready now but could have major impact as the technologies matured.37Global Private Equity Report 2023 While the energy transition promises to open up new areas for investment,it is also generating new risks and imperatives for PE portfolios.38Global Private Equity Report 202
253、3 What it didnt do was launch a bunch of expensive,high-profile projects.Rather,the strategy embraced a mosaic of large and small initiatives that together drove the company toward its reduction goals.Working with 60 leaders across the company,top management encouraged the organization to own the pr
254、ogram and find creative ways to reduce carbon within their business operations.The company could then map out priorities within the broader business context to ensure that reduction plans were practical and feasible.The mix of initiatives included using smarter routing and scheduling algorithms to r
255、educe fleet miles rather than making an immediate wholesale shift to electric and biodiesel vehicles.The company worked within its supply chain to add SBTi requirements into vendor contracts and reduce waste in logistics and ordering.What emerged was an SBTi-approved plan that,at run rate,would requ
256、ire a net investment of approximately$1 million annuallymuch less than anticipated.It would also protect hundreds of millions in revenues while dialing up the companys appeal as a supply chain partner.Because the strategywhich included a detailed governance structure,clear metrics,and a comprehensiv
257、e operating planwas cocreated with the companys line managers,it won broad organizational buy-in.That was central to minimizing financial and execution risk.The energy transition is,in many respects,unique among the global paradigm shifts that have driven private equity dealmaking over the past thre
258、e decades.It is fraught with politics,regionalism,regulatory uncertainty,and deep complexity.But it is also looking increasingly inevitable,suggesting that sitting on the sidelines is a clear risk for PE firms.As the transition builds into an engine of wealth creation(or destruction,if not addressed
259、),firms need to develop the experience,hone the capabilities,and nurture the networks that will allow them to turn change to their advantage.3939Web3 Remains Highly Relevant for Private EquityAnyone who lived through the dot-com meltdown in the early 2000s will undoubtedly see parallels in the curre
260、nt crypto collapse.Irrational exuberance(check).Lack of investment discipline(check).Implosions begetting implosions(check).Fraud and scammery(check and check).But these two periods of excess share something else in common that will have a much longer-lived impact on investing.Just as the first gene
261、ration of Internet technology matured to drive a wave of innovation in how we live and work,the technologies behind cryptocollectively known as web3 will continue to have broad impact beyond the world of Bitcoin and Bored Apes.Paradigm shift?Watching almost$3 trillion in web3-related asset value shr
262、ink by more than 70%is unnerving,to say the least.But the rise and fall of crypto isnt really the issue.What counts are the core underlying technologies that have made web3 possible,a set of innovations that will have far-reaching implications for many parts of the global economy,private equity incl
263、uded.The emerging web3 ecosystem now boasts thousands of companies funded by approximately$94 billion in start-up capital from venture funds,hedge funds,private equity,and other investors(see Figure 1).Major companies across industriesJPMorgan,Goldman Sachs,Google,and Disney among themhave begun to
264、think about how web3 will influence their businesses and what it could unlock in terms of managing transactions and engaging with customers.Crypto and nonfungible tokens(NFTs)have led wealthy young consumers to some of web3s foundational concepts,like digital wallets that can be used across platform
265、s.Forward-thinking private equity firms are also Despite the hype and turmoil in the crypto world,web3 technology is here to stay.By Thomas Olsen,Gene Rapoport,Alexander Mitscherlich,Kelly Pu,and Parker DeRensis40Global Private Equity Report 2023 focused on the ways in which blockchains,tokens,smart
266、 contracts,and related web3 technologies will affect how they invest and operate.These are still early days,and the recent crypto turmoil highlights how volatile technological innovation and regulatory transitions can be.But in some respects,the market correction and systematic cracks it exposed sta
267、nd to encourage the sort of rulemaking and business model innovation that can accelerate web3s evolution.Much as in the early,halting days of e-commerce,the evidence suggests that these innovations are unlikely to fade away.Already,we see three important ways in which web3 is becoming increasingly r
268、elevant for private equity:As an investment theme.Web3 will continue to attract sophisticated investors as blockchains and related technologies become part of the underlying infrastructure for a wide range of industries and use casesnot just crypto,which will be a small part of overall web3 developm
269、ent.As a disruptive threat(or opportunity)for the portfolio.Even if they arent in the game as investors,proactive funds are scanning their portfolios and augmenting due diligence of traditional companies,looking for web3 disruption threats and opportunities to create new value.Figure 1:Investors hav
270、e poured approximately$94 billion into web3 companies in recent years,most of it since 2021Notes:Equity investments only;does not include investments in crypto tokens;includes all deals classified in the Crypto/Blockchain vertical on PitchBook;Coinbases 2021 direct listing excludedSources:PitchBook;
271、Crunchbase;The Block;CoinDesk;Bain analysisCapital invested in web3-related companies globally($B)1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q$13B2Q 3Q 4QEarly-stage venture capitalLater-stage venture capital/growthOtherTotal 20162022:$94 billion2020200162021
272、202241Global Private Equity Report 2023 Whats become abundantly clear in the wake of the crypto collapse is that underwriting risk in this space requires a blend of web3 expertise and common business sense.42Global Private Equity Report 2023 As a tool for new fund strategies.Digital tokens have the
273、potential to transform how private equity funds raise and administer money.They could open up pathways to wealthy individuals and hasten the development of more-liquid fund formats.They could also lower administration costs and make fund operations more efficient.The web3 investment opportunityDespi
274、te all the Sturm und Drang around crypto,theres no denying it has been an important proof of concept for how web3 technologies work together.Web3s promise is an improved version of the Internet,one that is more interoperable than todays siloed web.Web1,which launched in the 1990s,was read-only,meani
275、ng content was pushed at users and nothing flowed the other way.Web2 ushered in social media and the ability to post your own content.Web3 is evolving as a new kind of Internet,with open protocols and standards that allow for new avenues of value transfer,data sharing,and application development acr
276、oss platforms.The foundational building blocks are blockchains,smart contracts,and tokens.Blockchains are open,decentralized databases and computing platforms that create security through a consensus mechanism.With the development of Ethereum starting in 2014,blockchains allowed users to securely ex
277、ecute lines of codeknown as smart contracts“on chain.”Tokens,meanwhile,are digital representations of data or assets registered on the blockchain ledger.They can be imbued with clearly defined terms of use(such as trading or governance restrictions)and can carry with them reams of data(escrow inform
278、ation for a real estate asset,say,or gaming assets that can be moved from platform to platform).From these building blocks come many core web3 concepts and tools.They include dApps(decentralized applications built on blockchain networks),DeFi(decentralized finance networks enabled by smart contracts
279、),DAOs(decentralized autonomous organizations),digital wallets enabling persistent digital identity,and open metaverses(see Figure 2).An example of smart contracts,tokens,and decentralized finance in action is the project JPMorgan,DBS Bank,and SBI Digital Asset Holdings implemented in November 2022
280、for the Monetary Authority of Singapore.It enabled foreign exchange and government bond transactions against liquidity pools comprised of tokenized Singapore Government Securities bonds,Japanese government bonds,Japanese yen,and Singapore dollars.Similarly,Goldman Sachs recently used its tokenizatio
281、n platform to arrange a 100 million bond sale between the European Investment Bank and two others.The sale settled in 60 seconds instead of the usual five days.Blockchain technology is abstruse.But it has opened minds to basic questions about the way things have always been run.Why,for instance,does
282、 it take more than an instant to wire money to London?If bitcoins can be traded around the clock,why not a share of Appleor a piece of KKRs latest fund?While blockchains,smart contracts,and tokens have gained the most traction in the finance sector so far,thats changing rapidly.Despite some growing
283、pains,IBMs Supply Chain Intelligence Suite,43Global Private Equity Report 2023 for example,helps companies use shared ledgers on blockchains to increase supply chain transparency and traceability,while sharing data more securely and efficiently with supply chain partners.In transport,companies inclu
284、ding FedEx,UPS,Delta Air Lines,and BNSF take part in the Blockchain in Transport Alliance to develop standards for blockchain-enabled technologies in the transportation and logistics industries.These efforts arent easy.Besides the technical challenges,web3 solutions inevitably require changes to lon
285、gstanding company and industry practices that can take time to resolve.But what started in Internet forums and white papers has turned into a full-fledged ecosystem over the last decade.Bain&Companys web3 and digital asset database tracks nearly 5,000 firms that have cumulatively raised more than$94
286、 billion,most of it over the past three years.Investment in 2022 declined from the frenzied pace a year earlier.But even in a less heated market,private investors injected between$20 billion and$30 billion into web3-related companies during the year.And that number doesnt include the significant int
287、ernal investments made by corporations and financial institutions.Initially,the web3 space was the domain of early-stage investors.But dealmaking has broadened to include later-stage growth funds,crossover funds,and even buyout funds.In our experience,the funds wading into this volatile space succes
288、sfully are establishing a few essential prerequisites:Figure 2:Web3 encompasses an array of concepts and toolsSources:Bain&Company;Andreessen HorowitzInfrastructure and building blocksApplications of that infrastructureBlockchainsOpen and interconnectedcommunity-owned databases and computing platfor
289、msdApps(decentralized apps)Applications built onopen networksenabling financial,social,and otheractivities DeFi(decentralized finance)Financial platformsthat run entirely oncode using smartcontracts on ablockchain(Open)digitalwalletsOnline passports that combine aspects of identity,access,and owners
290、hip forthe userDAOs(decentralized auton-omous organizations)Member-ownedcommunities with ashared bank accountTokenization of real-world assetsDigital,universalrepresentation ofassets such as property,gold,and artOpenmetaversesDigital spaces where users can live,interact,and explore Smart contractsPr
291、ograms enabling automationand execution of softwareon a decentralized computingplatformCryptocurrencies(digitally native money)Means to transfer value nativelywithin a digital ecosystemNFTs(nonfungible tokens)Blockchain-based,tokenized records that guarantee the uniqueidentification of a digital ass
292、et44Global Private Equity Report 2023 They are carefully matching targets to their specific mandate and risk appetite,making sure to create alignment around these choices from the investment committee on down.Firms are accomplishing this matching through their standard investment frameworks,but othe
293、rs are creating special vehicles.One large diversified buyout firm formed a separate fund with a clear mandate to go after Series A and B investments based on highly specific theses focused on web3 infrastructure.They are rapidly standing up teams to develop fluency in how web3 is likely to evolve o
294、ver the next 5 to 10 years and networking across the ecosystem to tap or hire specialized expertise.One firm,for instance,formed a team of four professionals devoted to tracking the web3 space and finding investments.Part of its mandate was to upskill others on the broader team to drive web3 awarene
295、ss across the firm.They are combining depth in web3 with their existing sector expertise to ensure that they understand specific use cases in due diligence and derive the sharpest investment insights subsector by subsector.Funds take two general approaches to this:creating a central web3 SWAT team t
296、o work with sector specialists,or embedding web3 specialists in select sector teams to eventually create subsector web3 experts.Either way,the benefit is balance:Web3 expertise is essential to identify the shape of potential disruption,and sector expertise is equally essential to understand specific
297、 industry impacts and which profit pools might be affected.A pragmatic way to make sense of the web3 universe is to separate it into categories.Financial infrastructure companies like crypto exchanges,brokerages,and custodians have attracted by far the most investment to date(see Figure 3).But capit
298、al is increasingly flowing to other parts of the ecosystemthe companies developing layer-one and layer-two blockchains,for example,or the core technology at the foundation of this infrastructure.There are also firms building software and developer tools on top of blockchains that enable specific use
299、 cases.Finally,there are user-facing applications and systems like gaming apps or NFT markets.Clearly,the activity within these themes runs the gamut in terms of risk.The sector is rife with highly speculative,overly leveraged,or outright unsustainable business models,many of which are currently bei
300、ng shaken out.But there are also later-stage companies with more scale that have real structural value and staying power.Given the sectors general state of fluidity,many investors may choose to focus on the closest thing this space offers to traditional tech-sector investing“pick and shovel”-type co
301、mpanies that are both supporting current web3 activity and positioning themselves to take advantage of emerging use cases across the economy.One example is Fireblocks,a promising custodial infrastructure platform that announced in September 2022 that its annual recurring revenue had surpassed$100 mi
302、llion.Fireblocks develops enterprise software tools that help companies manage digital asset operations.Financial companies like BNY Mellon use the software to securely hold clients digital assets in regulatorily compliant custody,and Fireblocks maintains a settlement network so those assets can be
303、transferred seamlessly between 45Global Private Equity Report 2023 Note:Chart excludes approximately$30 million in funding from companies that have raised less than$1 million in total fundingSources:Crunchbase;The Block;Bain Crypto DatabaseTotal disclosed funding received by companies in database,by
304、 primary subsegmentBlockchainsand platforms$11B$9BDeveloper tools andweb3infrastructure$9BWeb3 financial market infrastructure$49BUser applicationsand systems$16B4221619551,3861,997Coreinfra-structureNumber ofcompanies Cross-chain bridgesCryptocurrenciesCross-chain protocolsService chainsEnterprise
305、chainsSpecial-purpose chainsGeneral-purpose protocols(Ethereum virtual machine)Scaling and sidechainsGeneral-purpose protocols(non-EVM)Figure 3b:Blockchains and platforms have attracted about$11 billion of web3 company fundingFigure 3a:Financial market infrastructure companies have received more tha
306、n half of all web3 investment to date,but the market is broadening Note:Chart excludes approximately$30 million in funding from companies that have raised less than$1 million in total fundingSources:Crunchbase;The Block;Bain Crypto DatabaseTotal disclosed funding received by companies in database,by
307、 primary subsegmentBlockchainsand platforms$11B$9BDeveloper tools andweb3infrastructure$9BWeb3 financial market infrastructure$49BUser applicationsand systems$16B4221619551,3861,997Coreinfra-structureNumber ofcompanies 46Global Private Equity Report 2023 Figure 3c:Core infrastructure has attracted a
308、bout$9 billion of web3 company fundingFigure 3d:Developer tools and web3 infrastructure have attracted about$9 billion of web3 company fundingBlockchainsand platforms$11B$9BDeveloper tools andweb3infrastructure$9BWeb3 financial market infrastructure$49BUser applicationsand systems$16B4221619551,3861
309、,997Coreinfra-structureNumber ofcompanies Note:Chart excludes approximately$30 million in funding from companies that have raised less than$1 million in total fundingSources:Crunchbase;The Block;Bain Crypto DatabaseTotal disclosed funding received by companies in database,by primary subsegmentStakin
310、g infrastructureNode infrastructureMining service support and toolsMining companiesBlockchainsand platforms$11B$9BDeveloper tools andweb3infrastructure$9BWeb3 financial market infrastructure$49BUser applicationsand systems$16B4221619551,3861,997Coreinfra-structureNumber ofcompanies Note:Chart exclud
311、es approximately$30 million in funding from companies that have raised less than$1 million in total fundingSources:Crunchbase;The Block;Bain Crypto DatabaseTotal disclosed funding received by companies in database,by primary subsegmentOtherDeveloping,testing,and releasing kitsGaming infrastructure a
312、nd toolsIdentity kitsAuditing and securityBlockchain as a serviceNFT minting toolsData analyticsTokenization infrastructureData management and storageGeneral infrastructure47Global Private Equity Report 2023 Figure 3f:User applications and systems have attracted about$16 billion of web3 company fund
313、ingNote:Chart excludes approximately$30 million in funding from companies that have raised less than$1 million in total fundingSources:Crunchbase;The Block;Bain Crypto DatabaseTotal disclosed funding received by companies in database,by primary subsegmentBlockchainsand platforms$11B$9BDeveloper tool
314、s andweb3infrastructure$9BWeb3 financial market infrastructure$49BUser applicationsand systems$16B4221619551,3861,997Coreinfra-structureNumber ofcompanies Gaming applicationsNFT markets and displayEmerging token usesMetaverse/virtual spacesNFT creators and labsSocial platforms and networksMusic/vide
315、o NFTsOtherFigure 3e:Financial market infrastructure companies have received about$49 billion of web3 company fundingNote:Chart excludes approximately$30 million in funding from companies that have raised less than$1 million in total fundingSources:Crunchbase;The Block;Bain Crypto DatabaseTotal disc
316、losed funding received by companies in database,by primary subsegmentBlockchainsand platforms$11B$9BDeveloper tools andweb3infrastructure$9BWeb3 financial market infrastructure$49BUser applicationsand systems$16B4221619551,3861,997Coreinfra-structureNumber ofcompanies Retail brokersExchangeLending/c
317、reditWalletsCustodyPayments and payment infrastructureBankingOther DeFiInstitutional brokersDecentralized finance exchangeOther48Global Private Equity Report 2023 Fireblocks wallets when they are bought and sold.The company has raised$1 billion in funding from BNY Mellon and other leading investors,
318、including Coatue and General Atlantic,partly on the bet that crypto is just the beginning.Currently,Fireblocks solutions focus on safely storing and transferring tokens like Bitcoin,but the company is positioned to service firms storing other tokenized assets that might emerge in the future.Other pi
319、ck-and-shovel companies include“node”businesses like Alchemy and QuickNode,which help run the connection points between users or developers and chains,whether the transactions involve crypto,tokenized bonds,or anything else.Likewise,Chainalysis,Elliptic,and TRM use analytics in various forms to moni
320、tor transactions and smart contracts on blockchains to ensure compliance and that the digital infrastructure is safe.Crypto-related applications have powered growth for these companies so far,but their technology can monitor any kind of blockchain transaction.That helps explain why Mastercard bought
321、 Chainalysis competitor CipherTrace in 2021 to“differentiate its Mastercards card and real-time payments infrastructure”as merchants increasingly seek to build virtual asset offerings.Whats become abundantly clear in the wake of the crypto collapse is that underwriting risk in this space requires a
322、blend of web3 expertise and common business sense.Much as it was in the dot-com era,the investors that have run into trouble are those that failed to truly understand underlying business modelsor if there even was one.Too many this time around have placed what amounted to heavily leveraged bets on c
323、ompanies whose value rested on the price of crypto,often perilously so.As the dot-com bubble taught us,the biggest gains in the aftermath of a crash accrue to investors that can sift through the wreckage and identify the companies with viable,scalable business models the best-in-class companies that
324、 are capable of generating cash sooner rather than later.Public markets will buy and sustain anything the venture funds are selling on the way up,but only some will find a way forward once the spigot is turned off.Web3 is nascent enough that winners and losers are difficult to discern right now.But
325、thats why the funds with the best chance of identifying them are standing up web3 teams and marrying them with their firms seasoned investment professionals.Finding strong targets and underwriting risk will rely on the ability to draw out potential scenarios using a future-back approach.But it will
326、also require fundamental due diligence.Is the business plan viable?What is the unit-cost analysis?When can investors reasonably expect to see real cash flow?Who are the companys customers,and are they credible?Is there a path to scale?Firms can tailor the decision to invest in the web3 space to matc
327、h their mandate and risk appetite.But success will ultimately entail augmenting your differentiated value proposition with web3 knowledge and expertise.While that takes commitment,it will likely pay off in fresh investable insights as web3 continues to evolve.49Global Private Equity Report 2023 Iden
328、tifying disruption threat(and opportunity)across the portfolioWhile funds that focus on more mature companies and industries may not want to play in the web3 arena,theyd be ill advised to ignore it.Over the next decade,the burgeoning set of web3 innovations could affect a broad sweep of industries a
329、nd companies,some of which arent necessarily obvious today.Funds need to understand what these changes might mean for more traditional portfolio companies both in terms of disruption risk and opportunities to go on offense.Those insights come from scanning the current portfolio for potential web3 ex
330、posure and probing these issues in due diligence.One large diversified fund,for instance,has evaluated where web3 developments could present threats or opportunities for portfolio companies and where the potential impact is too far off to worry about given the expected holding period.These insights
331、flow to the firms portfolio teams,who can then use them to help companies navigate challenges or seize opportunities.They also inform due diligence.When conducting diligence on a payments company recently,another large buyout fund added a web3 module to its usual process.That helped the team discove
332、r potential risks of web3-based disruption,which ultimately became meaningful in valuing the company.The most effective scans map a portfolio sector by sector,looking at the pace of potential disruption,regulatory changes,and other factors that might accelerate or decelerate change.That leads to a c
333、learer picture of how and when web3 is likely to reshape the industry and how much opportunity there might be to capitalize on those shifts(see Figure 4).In sectors like financial services,the threat of significant change is already apparent.But the balance of risk and opportunity differs by subsectorand even for individual companies within a subsector.In payments,for instance,open transactional i